Sept. 20 (Bloomberg) -- Citadel Investment Group LLC and JPMorgan Chase & Co. agreed to take over energy-trading positions from Amaranth Advisors LLC, the hedge fund whose wrong-way bets lost about $4.6 billion this month, two people with knowledge of the decision said.

Separately, Citigroup Inc., the biggest U.S. bank by assets, is in talks to buy a stake in Greenwich, Connecticut-based Amaranth, two people involved in those discussions said.

Amaranth, which had $9.5 billion of assets in August, was forced to unload the trades after swings in natural-gas prices last week turned it into the biggest hedge fund meltdown since Long-Term Capital Management LP's 1998 collapse. Transferring the bets would stem Amaranth's losses, freeing the firm to seek the cash infusion it may need to stay in business.

``Normally, you would want to try to manage yourself out and improve it, stop the bleeding and then sell it in three months or something, once the crisis has passed,'' said Mark Haedicke, the former general counsel for Enron Corp.'s trading unit, who's now a Houston-based energy consultant and managing partner of ETS Energy Partners Ltd. ``To sell it in the middle of a crisis to me indicates a greater disaster.''

Chicago-based Citadel, the $12 billion hedge fund group led by Kenneth Griffin, and JPMorgan, the No. 3 U.S. bank by assets, will assume the portfolio's risk of further losses.

Citadel's Energy Push

Griffin pushed into energy trading in 2001 as Enron's implosion drove other firms out of the market. As of early 2005, the firm had a 70-member team trading power and natural gas. New York-based JPMorgan is building a power- and gas-trading business around George ``Beau'' Taylor, whom it hired from Morgan Stanley last year.

Details on how JPMorgan and Citadel would manage the positions weren't immediately available. Amaranth told investors in a letter earlier today that it reached a deal to transfer all its energy trades to an unnamed third party. CNBC reported later that Citadel and JPMorgan agreed to take over the bets.

Officials at Citadel, JPMorgan, New York-based Citigroup and Amaranth declined to comment before a public announcement.

``Potentially, they bought at a very good price,'' said Mark Williams, a finance professor at Boston University and former risk manager of electricity trader Citizens Power. ``If they have longer time horizon and they can withstand the volatility and the short-term fluctuations, they then have a good chance of making some serious cash.''

Citigroup Talks

A stake in Amaranth could give Citigroup a share of the firm's management and performance fees. The stake would be part of Citigroup Alternative Investments, the division that runs its hedge fund, private equity, real estate and structured-product holdings, according to the people familiar with the bank's discussions with Amaranth.

Some of Amaranth's energy investments consist of positions in gas futures, options and over-the-counter contracts that would gain in value as prices rise, according to one person with knowledge of the situation.

Goldman Sachs Group Inc., the world's biggest trader by revenue, was in talks to take over Amaranth's energy bets until Citadel offered better terms, two people familiar with that situation said. Goldman withdrew from the negotiations within the past two days, they said.

Amaranth founder Nicholas Maounis told investors on Sept. 18 that the two hedge funds lost 50 percent this month, leaving them down 35 percent for the year.

Calgary View

Brian Hunter, Amaranth's co-head of energy, orchestrated the failed trades from Calgary, in the Canadian province of Alberta. Yesterday, the firm's offices there were vacant at 8:30 a.m. local time, with a half-empty bottle of liquor sitting on one desk. Today, there's no sign of trading activity and the windows are papered over.

Amaranth, which made so-called spread trades that aim to profit from price discrepancies among different contracts, was at least the second hedge fund to be rocked by bad investments in natural gas. MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, closed last month.

``It's certainly a reminder that investing in certain hedge funds is a risky business,'' U.S. Securities and Exchange Commission Chairman Christopher Cox told reporters yesterday. ``It's not for mom and pop.''

Last year, Amaranth's energy and commodities bets gained 72 percent. They were up 52 percent through June of this year, according to marketing documents for a new fund it planned to raise. Hunter, 32, would have run the new fund.

Bearing the Losses

So-called funds of funds that invested with Amaranth may bear much of its losses. Goldman Sachs Dynamic Opportunities Ltd., a London-based fund, reported yesterday that it sustained losses on an investment whose description fits Amaranth. The fund's shares fell 3.7 percent yesterday and are down 1 percent today.

Morgan Stanley, Credit Suisse Group, Bank of New York Co., Deutsche Bank AG and Man Group Plc all run funds of funds that had investments in Amaranth as of June 30.

The $9.2 billion pension fund of 3M Co., the maker of Post- it Notes as well as electronics and cleaning products, had less than 1 percent of its assets in Amaranth, said Jacqueline Berry, a spokeswoman at the St. Paul, Minnesota-based company. The $7.2 billion San Diego County Employees Retirement Association invested $175 million in Amaranth in 2005.

Maounis, a 43-year-old University of Connecticut finance graduate, founded Amaranth in 2000 after working at Greenwich- based Paloma Partners for 10 years.

Greenwich HQ

His firm occupies a beige, four-story office next to a pond and manicured lawn with a fountain in Greenwich, home to more than 100 hedge funds, private pools of capital that allow managers to participate substantially in the gains on clients' investments. The building houses a gym and a game room, with pool tables for employees.

After starting in convertible-bond trades and betting on stocks of merging companies, Maounis expanded into energy, hiring Hunter, a University of Alberta graduate in applied mathematics and former Deutsche Bank trader. As of June 30, energy trades accounted for about half of the capital in Amaranth's funds and generated about 75 percent of their profit.

Earlier this month, Amaranth bought a portfolio of gas trades from Amsterdam-based ABN Amro Holding NV, which itself had taken them over from MotherRock.

``If one is speculating in that kind of market, there's going to be some downside risk,'' said Shannon Burchett, who traded oil for JPMorgan and Citigroup. in the 1990s and now runs an energy consulting firm in Dallas. ``They should have the controls and risk management strategies in place to mitigate those kind of outcomes.''

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: September 20, 2006 16:50 EDT