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AP7 hit by Amaranth hedge fund collapse

SWEDEN - Sweden’s SEK80bn (€8.7bn) Sjunde AP-fonden AP7 buffer fund is among investors who’ve lost out in the implosion of natural gas trading hedge fund Amaranth Advisors LLC.

Amaranth has racked up $6bn in losses, affecting investors such as the $9.2bn 3M pension fund and $6.36bn San Diego County retirement fund. AP7’s exposure was via a fund of hedge funds with Swiss-based EIM.

The development follows AP7 putting EIM on watch due to “administrative issues” in March this year. The pension fund has €83m each with EIM and its other fund of hedge funds supplier K2 Advisors.

EIM partner William Glass told IPE today that those issues, which he said involved communication and the third-party custodian, had now been resolved.

Glass said: “These administrative issues had nothing to do with pricing or EIM’s administration. It had to do with difficulties in administration between the custodian of the account and an external accounting party so it was external to EIM’s management. Those issues have indeed been resolved and we believe they have been resolved to AP7’s satisfaction.”

AP7 had 2% of its assets with EIM, whose exposure to Amaranth amounted to 2.5%. AP7 could not state how big its loss was while San Diego put its loss at as much as $45m.

AP7 chief executive Peter Norman told IPE that he does not intend to change the portfolio, which has another 2% invested with K2.

“I think this incident shows that it is wise to diversify among a lot of hedge funds so we invest in two fund of funds and if you include all of their sub-funds I think there is more than 30 sub-funds”.

He says the attraction of hedge funds is that “they are something in between fixed income exposure and fixed-income return and risk and equity expected return and risk”.

Brian White, CEO at the San Diego Pension Fund, defended its investment strategy - pointing to enormous gains in the last few years. San Diego’s retirement scheme earned 15.6% from its Amaranth investments in the year ending on June 30, with similarly high returns over the years before.

Amaranth has now transferred its energy portfolio to JP Morgan and fellow hedge fund Citadel. There are also talks being held on selling some of the fund’s non-energy investments to Citigroup.

Connecticut-based Amaranth had seen its assets drop from $9.5bn as recently as last month to $3.5bn, Bloomberg News reported - adding it’s the biggest hedge fund collapse since Long-Term Capital Management failed in 1998.

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