Tuesday, September 19, 2006

Amaranth - A Deeper Level of Understanding

An April 2006 article in ALPHA magazine spotlights SDCERA's CIO David Deutsch and his allocation of roughly $1.3 billion, or one fifth the Plans total assets, to an alpha engine portfolio. He decided to dispense with the fund of funds convention and save some "real money" self-diversifying by;
"adding some big-name multi-strategy funds to the mix. It allocated $175 million each to D.E. Shaw & Co. and Amaranth Advisors in addition to giving $125 million to Silver Point Capital. In so doing, the fund demonstrated that it has deepened its level of understanding, vis-à-vis individual hedge fund strategies, choosing Amaranth for its arbitrage approach and D.E. Shaw for its quantitative models that include statistical arbitrage. Silver Point further diversifies the portfolio through its active investing and loan origination activities."
The point - even sophisticated investors despite a "deepened level of understanding" still face uncertainty and the risk of large losses when allocating to levered funds. Amaranth was, in theory, a "multi-strategy" hedge fund. However, it's collapse suggests it's risks were not detected by an expert fiduciary's due diligence process. Smaller pension investors without sophisticated due diligence resources are at even greater risk that allocations to complex investment strategies could generate losses and subsequent fiduciary trouble.



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