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SDCERA Loses Amaranth Decision, Will Appeal

U.S. District Court for the Southern District of New York has dismissed a securities fraud lawsuit filed in 2007 by the San Diego County Employees Retirement Association (SDCERA) against Amaranth Advisors, a hedge fund that collapsed. SDCERA invested $175 million in Amaranth and got $90 million back. It hopes to get the remainder back if its appeal is successful, confirms Brian White, SDCERA's chief executive. Amaranth went out of business after a trader lost $6.5 billion of its $9 billion making bad bets in natural gas futures. The court ruled that Amaranth had made disclaimers warning of risks. SDCERA argued that such disclaimers didn't excuse the wild gambling that the hedge fund did. White says that none of Amaranth's disclaimers warned that Amaranth would break the law. The fund was sanctioned by the Federal Energy Regulatory Commission.

SDCERA's hedge fund adventure led to one resignation under duress. In March of 2009, David Deutsch, the chief investment officer of SDCERA, resigned because of his bad hedge fund gambles, including Amaranth. At one point the county had 20% of its pot in hedge funds. By the time Deutsch departed, that was down to 14%.

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U.S. District Court for the Southern District of New York has dismissed a securities fraud lawsuit filed in 2007 by the San Diego County Employees Retirement Association (SDCERA) against Amaranth Advisors, a hedge fund that collapsed. SDCERA invested $175 million in Amaranth and got $90 million back. It hopes to get the remainder back if its appeal is successful, confirms Brian White, SDCERA's chief executive. Amaranth went out of business after a trader lost $6.5 billion of its $9 billion making bad bets in natural gas futures. The court ruled that Amaranth had made disclaimers warning of risks. SDCERA argued that such disclaimers didn't excuse the wild gambling that the hedge fund did. White says that none of Amaranth's disclaimers warned that Amaranth would break the law. The fund was sanctioned by the Federal Energy Regulatory Commission.

SDCERA's hedge fund adventure led to one resignation under duress. In March of 2009, David Deutsch, the chief investment officer of SDCERA, resigned because of his bad hedge fund gambles, including Amaranth. At one point the county had 20% of its pot in hedge funds. By the time Deutsch departed, that was down to 14%.

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Comments
8

If Deutsch hadn't gambled with a hedge fund, he would probably have been accused of fuddy-duddyism, failing to go for the big returns. For a while it seemed as if almost everyone responsible for investment pools, such as pension funds, was willing and eager to jump onto the latest hot thing. And that was hedge funds. Now we are all sadder and wiser.

Or are we wiser at all?

March 18, 2010

Response to post #1: Private sector funds are sadder and wiser -- slicing their equity portions, avoiding private equity, hedge funds, etc. That's partly because of accounting changes. Public sector funds are shooting craps as never before. Best, Don Bauder

March 18, 2010

Private sector pensions funds are not back stopped by the taxpayers-that is why SDCERA is investing in hedgefunds and private equity, SDCERA takes all the profits if the high risk pays off while taxpayers pay up if the wild gamble fails.............hhhmmmm, where have we seen this before.

March 18, 2010

Response to post #3: That's one reason why public funds are rolling the dice while private funds are going conservative. But there are other reasons: for example, private sector funds have to write off losses in seven years or fewer. Best, Don Bauder

March 19, 2010

private sector funds have to write off losses in seven years or fewer. Best, Don Bauder

I didn't know that.

I am guessing here that public pension funds can carry bad assets on the books as long as they want (indefinitely, and hope for a gain), instead of actually booking any losses??????

March 19, 2010

Response to post #5: Y'know, I don't know the answer to that. When, if ever, do public sector funds have to write off losses? I am making some calls to these folks in the next couple of days and will try to find out. Best, Don Bauder

March 19, 2010

Dan Bauder personalizes everything for effect. It is a cheap trick. The SDCERA board and its consultants and Brian White all approved the hedge fund program at the fund. Deutsch had no authority to make such investments without the support of staff, the asst. cio, several consultants, the board and administration.

Similarly, if Deutsch had advised pulling back on equity investments in 2007, the fund would have had subpar returns for a long time before being vindicated by the great depression of 08. In that interval, the cio would have come under criticism by more knowledgeable individuals like Dan Bauder or board trustees and forced to resign anyway. Bauder, in particular, seems to know everything. Isn't that amazing

This rag is yellow. No well-intentioned person should pay attention to it.

April 7, 2010

Response to post #7: As the blog item notes, Amaranth was only one reason Deutsch was forced out. He had his "Alpha" strategy, which I explained in a column a couple of years ago, that had a high percentage tied up in hedge funds. He got rave reviews in investment publications while it was working, but then it stopped working. Incidentally, if SDCERA had pulled back on equity investments in 2007, the fund would not have recorded subpar returns for very long. The market peaked and began cracking in late 2007. Best, Don Bauder

April 7, 2010

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