June 7, 2007

UPDATE 1-Amaranth seeks to dismiss San Diego lawsuit

NEW YORK, June 7 (Reuters) - Amaranth Advisors LLC, the hedge fund firm that collapsed last year after $6 billion in losses, on Thursday asked a U.S. District Court to dismiss an investor lawsuit, saying the pension fund was adequately apprised of its risk, according to court filings.

The San Diego Employees Retirement Association (SDCERA) sued Amaranth in March for $150 million in the first and so far only investor lawsuit over the biggest hedge fund collapse ever. The suit claimed Amaranth violated its investment mandates by not maintaining proper portfolio diversity or risk controls.
Greenwich, Connecticut-based Amaranth, which is in the process of liquidating assets now valued at about $400 million, said in Thursday's court filing in Manhattan that its offering documents do not require it to maintain investment diversity as the San Diego fund claimed. The case is being closely watched in the hedge fund industry.

"By investing in the fund, subscribers are relying on the discretionary, market judgment of the manager, trading in a wide range of strategies and markets, without being subject to diversification, leverage or any other form of trading policies," said Amaranth in the filing.

Amaranth, a hedge fund manager with about $9.3 billion in assets last year, imploded last September after billions of dollars in bets in the natural gas market went sour. SDCERA invested $175 million into Amaranth, but has recovered some $63 million so far from its liquidation.

One lawyer not involved in the case said the San Diego fund may have difficulty prevailing in its suit, since the offering documents typically give a hedge fund manager wide discretion in pursuing profitable strategies.

"If you have a very broad latitude in the types of investments you can make, that generally puts the investor on notice," said Eric Roper, chairman of the hedge funds practice at Gersten Savage LLP in New York. "But if risk controls were not up to best practices standards, or anywhere near best practices, that could be an issue."

Representatives of SDCERA could not immediately be reached for comment.

The motion comes just after the San Diego fund released the findings of an eight-month review by a grand jury, which sought to investigate prior to the Amaranth collapse whether the fund was being properly managed.

The report, which is posted on SDCERA's Web site, suggested that the pension fund was well apprised of the risk of Amaranth.

The Amaranth contract signed by SDCERA has "17 pages devoted to a wide variety of risks that could cause the investor to lose all or part of his money, and this contract, in particular, highlighted the risks involved in energy trading," the report said.

It also said that because Amaranth charges higher fees than many hedge funds, it made Amaranth "a much riskier fund," since "the manager would be under pressure to take on higher risks for greater gain to satisfy and retain investors." Most hedge funds charge a 2 percent management fee, but Amaranth charged a 1.5 percent fee plus 2 percent for expenses.

The report also recommended that the San Diego fund hire an internal risk manager to monitor its $7.9 billion portfolio, which includes $1.5 billion in 11 hedge funds, with managers including D.E. Shaw & Co., Silver Point, AQR and others.

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