Are Hedges Losing Their Sizzle?

Until recently, investor money seemed to flow only one way when it came to hedge funds: in. Amaranth Advisors might change that.

Hedges’ message about big returns regardless of the market has been especially seductive the past few years -- low interest rates and lackluster stock markets made investors everywhere hungry for returns. For pension funds with large obligations to workers, the message was even more alluring. But some pension managers -- especially at public pensions -- lack the resources, expertise and time to keep a close eye on the people managing the money.

Some of these institutional players were burned by troubles at Amaranth, the Greenwich, Conn., hedge fund that lost billions of dollars in a week on bad natural-gas bets. The $7.7 billion San Diego pension fund had $175 million invested in Amaranth; 3M Co. had "less than 1%" of its pension plan -- which exceeded $9 billion at the end of 2005 -- in play.

Both were put into Amaranth by Connecticut's Rocaton Investment Advisors. Such consultants monitor the hedge funds they choose for investors. Amaranth's dependence on one aggressive trader -- 32-year-old Brian Hunter -- should have rung warning bells among advisers. Amaranth's dependence on natural-gas bets should also have rung bells. The hedge fund billed itself as a "multistrategy" fund, which promised investors diversification by using different approaches in different markets. But the bells weren't loud enough in this case. Rocaton declined to comment.

Even before Amaranth, there were signs the explosive growth of hedge funds was losing steam. By some measures, more funds have closed this year than opened. The failure of an especially large multistrategy fund to be truly diversified, and the failure of the watchdogs to catch it, could frighten away the kind of pension plans that were just starting to take the plunge.

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