It has been almost a week since the Amaranth story broke but there are still a lot of layers to pull back from this onion.

A reader sent in this link to a press release highlighting a speech the chief investment officer for the county of San Diego’s pension system gave recently.

David Deutsch has been the CIO of the San Diego County Employees’ Retirement Association since 2004. And he is very proud of his well-documented effort to invest more and more in hedge funds.

In the speech (it’s not clear when it was given), Deutsch talked about hedge funds and he offered an insight:

On the pertinent topic of transparency, Deutsch said that many hedge funds still do not offer transparency and he doesn’t expect this to change in the near term, especially with the larger funds. He relies on return based factors to offset the absence of transparency from these managers commenting that “no one cares about inefficiencies and transparency if a manager produces outsized returns.”

This is a very revealing quote.

Deutsch says he “relies on return based factors to offset the absence of transparency …” In English, this means that if a hedge fund is performing well, Deutsch doesn’t mind if it’s secretive. As long as a hedge-fund manager is producing outsized returns, Deutsch said, no one cares how they do it.

This is dangerous. If a hedge fund makes a lot of money very quickly, that should provoke just as much skepticism as it does celebration. In fact, before the county invested its money in Amaranth, the hedge fund had skyrocketed in value in a short time based on the same kind of investments that derailed it last month. The profits were so enormous, in fact, that the head trader for Amaranth reportedly pocketed a $100 million bonus.

If a fund can make that much money that quickly, it can lose it as well.

In his speech, Deutsch also had an interesting point about the notoriously high fees that hedge funds charge. Again, from the press release:

Deutsch said that SDCERA has been successful in negotiating lower fees through longer lock-up periods.

A “lock-up period” means that you can’t take your money out for that time. As I’ve reported, the county has applied to “terminate its relationship” with Amaranth. But that might not be so easy.

The Financial News Online is reporting that investors in Amaranth – presumably including the county – may have to wait up to four years to get their money out. The hedge fund, apparently, has plenty of rules in place to protect itself.


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