For $9 Billion Hedge Fund Amaranth, R.I.P.

In the hedge fund world, death can be relentlessly quick and efficient. That's certainly the case with Amaranth Advisors LLC, which lost over $6 billion in a week.

The fund desperately tried to sell itself to Citigroup (which, by the way, wants to get more involved in hedge funds). But despite the extensive talks and negotiations, Citigroup decided to walk according to a report from the Wall Street Journal.

Now, it's just a matter of liquidating the fund.

The leader of Amaranth, Nick Maounis, wrote a letter to his shareholders about the matter. Basically, all requests by shareholders for redemptions will be suspended. This is in order to give the fund enough breathing-room to effectively sell-off the positions.

According to the letter: "We estimate that, as of Friday, September 29, 2006, the Net Asset Value of the multi-strategy funds had declined approximately 65% to 70% month-to-date and approximately 55% to 60% year-to-date."

The lessons from all this? Well, no matter how smart your team is, the market is often smarter. In the case of Amaranth, the firm was apparently too lax in its internal controls. It allowed a young trader to take huge bets on the direction of a highly volatile commodity: natural gas.

This episode also shows that mutual funds, in comparison, are actually a good investment. They are provide diversification and low costs (keep in mind that hedge funds have very high fee structures). More importantly, mutual funds are very transparent. In fact, the disclosures for investors can be overwhelming.

True, you are probably not going to make a killing from a plain-vanilla mutual fund. But, then again, you'll probably not lose your shirt, either.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.