Winding up Amaranth
Here is a great, long, summary of the challenges of winding up Amaranth Advisors, that once feared $7 billion hedge fund. If you’re a fan of legal docs, this one is a doozy.
If you read the fine print, you get a sense of why it is inconceivable that pension funds can continue to support the idea that hedge fund managers:
– have a zero cost of capital
– pay out all of the “promote” based upon a single year’s performance rather than the performance of the team over the life of a fund
– do not ask the team to sign guarantees should the fund explode, and the promote that was paid earlier in the life of the fund is no longer “earned” based upon the fund’s overall performance
Here is an excerpt from Amaranth’s LP agreement regarding imdemnification of employees (note the reference to “gross negligence” vs. mere “negligence”; confirms that no employees, regardless of the financial losses, are liable unless there was intentional misconduct (I’m assuming that intentionally laying on disasterous natural gas arbitrage trades doesn’t count as misconduct):
The Limited Liability Company Agreement further provides that the Master Fund will indemnify, defend, and hold harmless the managing member, its Affiliates and, at the discretion of the managing member, the Master Fund’s agents, employees, advisors and consultants from and against any losses arising as a result of business or activities undertaken on behalf of the Master Fund, other than such losses as result from the bad faith, fraud, gross negligence or reckless or intentional misconduct of such parties, or the violation by such parties of such lesser standard of conduct as under applicable law prevents that indemnification, or as a result of actions so found by a court of competent jurisdiction, after entry of a final judgment, to have been taken without a reasonable belief that they were properly authorized by the Limited Liability Company Agreement. All such rights of indemnification shall survive the dissolution of the Master Fund.