You may have noticed that the financial world is abuzz about the sudden collapse of the hedge-fund Amaranth Advisors, which let it be known yesterday that it had lost about half of its assets in a week.

One of the hardest hit from Amaranth’s fall may be the county of San Diego’s employee pension fund.

The San Diego County Employees’ Retirement Association, or SDCERA, last July decided to invest $175 million in Amaranth as part of its continuing march into risky hedge funds.

The county’s pension system, which is facing a $1.4 billion shortfall, has been investing more and more in hedge funds over the past two years. Investments in hedge funds now make up about one-fifth of the $7.4 billion in assets the pension fund has collected – or $1.5 billion. For comparison, the California Public Employees Retirement System, or CalPERS, has a total of $2 billion invested in hedge funds. CalPERS, however, is nearly 30 times the size of the county’s pension system.

The county could conceivably have lost between $40 million and $60 million in one week with Amaranth’s fall. According to reports, Amaranth had increased in value 30 percent in the months leading up to September only to fall hard last week, losing perhaps 50 percent of its assets. It’s hard to tell because unlike many investments, hedge funds are not required to publicly disclose information about their activities or investments.

The Wall Street Journal is reporting that Amaranth’s assets were worth $9 billion at the beginning of September and are now worth $4.5 billion.

I’ve got calls in to the county’s pension CEO Brian White and Chief Investment Officer David Deutsch.

Deutsch has proudly led the county’s march into hedge-fund investing. The “alpha engine,” as the county calls his program, was highlighted by an investment magazine in February as a way to “power returns.”

Deutsch has been aggressively moving the retirement system’s assets into hedge funds. From the story:

In his first 18 months on the job, he hired three multi-strategy hedge funds – New York’s D.E. Shaw & Co. and Greenwich, Connecticut-based Silver Point Capital and Amaranth Advisors – as well as Berens Capital Management, a New York emerging-markets fund of hedge fund.

And, well, let Deutsch tell it:

“We’re not done by a long shot.”

Deutsch’s assistant, Lisa Needle, in that same article, gave a hint as to why they chose to invest in Amaranth:

Needle says Amaranth, with $6 billion in assets under management, has a broad base of globally focused, diversified strategies …

You have to wonder how diverse a fund can be if it can lose half its assets in one week based on the price of natural gas.

Even if the Amaranth disaster turns out to be as bad as it can be for the county’s pension system, it won’t immediately show up as a problem. The county “smooths” its investment losses and gains over three years.

I’ll keep posting on this.

SCOTT LEWIS

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