Ailing hedge fund transfers energy portfolio

HARTFORD -- A Connecticut hedge fund trying to survive after admitting to investors that it lost billions of dollars in the natural gas market has transferred its energy portfolio to a third party.

Greenwich , Conn. -based Amaranth Advisors told investors this week that its dealings in the natural gas market -- where prices are more than 50 percent lower than a year ago -- are expected to cause the hedge fund to lose 35 percent of its assets.

The company opened the year with $7.4 billion and saw assets shrink to about $4.5 billion from an August high of $9.2 billion.

Company spokesman Shawn Pattison yesterday said the company would not identify the third party taking over Amaranth's energy holdings.

``We have concluded a negotiated transaction which transfers the entirety of our energy portfolio to a third party," company founder Nicholas Manious wrote in a note to investors. Manious told investors that more information would be available soon.

Hedge funds have much higher minimum investments than mutual funds and typically are much more active traders. Hedge funds can use techniques off limits to mutual funds, such as shorting stocks and commodities, essentially betting they will fall.

Amaranth lost billions because of incorrect bets on natural gas futures prices, which recently dropped as U S supplies bulged and concerns about output disruptions eased.

Analysts attributed the recent sharp sell-off in natural gas to a rising inventory of fuel, slack demand, and a relatively tame hurricane season that eased fears about possible supply disruptions in the Gulf of Mexico.

Peter Fusaro, principal and co founder of the New York-based Energy Hedge Fund Center, said Amaranth was in a ``death spiral" for months because it was so highly leveraged in the volatile natural gas market and seemed to have lax risk controls.

He said observers had predicted a fall, although they did not expect it to be so large.

``This is rogue trading at its best," said Fusaro, whose company tracks 525 energy hedge funds. ``It's an arrogance I can't even describe to you."

The hedge fund industry has come under fire in the past for risky investments, and the federal Securities and Exchange Commission has moved unsuccessfully to adopt regulations. Last month, the SEC announced it will not challenge a federal appeals court ruling that overturned new rules for oversight of hedge funds.

SEC chairman Christopher Cox said the SEC would instead introduce a new anti fraud rule and consider increasing the minimum asset and income requirements for investors.

Those who oppose regulations have long argued that hedge funds attract sophisticated investors. They say the government should focus its limited resources on mutual funds that serve far more investors of modest means.

Connecticut Attorney General Richard Blumenthal promised to investigate the company's holdings and losses.