Sept. 20 (Bloomberg) -- Amaranth Advisors LLC, the hedge fund whose wrong-way bets lost about $4.6 billion this month, reached an agreement to transfer all of its energy trades to an unidentified third party, according to a letter sent to investors.

Nicholas Maounis, Amaranth's founder, said in his letter, a copy of which was obtained by Bloomberg News, that more details will follow ``shortly.'' The Greenwich, Connecticut-based firm was in negotiations with Citadel Investment Group LLC as of late yesterday, two people with knowledge of those talks said.

Amaranth 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. By transferring the bets, Amaranth would stem its losses and the new investor would be at risk of any further declines in the gas market.

``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.''

Amaranth spokesman Shawn Pattison declined to comment. A call to Scott Rafferty, managing director at Citadel, wasn't immediately returned.

`Risky Business'

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.

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,'' Securities and Exchange Commission Chairman Christopher Cox told reporters yesterday. ``It's not for mom and pop.''

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.

Amaranth's Investors

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.

Amaranth was founded by Maounis, a University of Connecticut finance graduate. After working at Greenwich-based Paloma Partners for 10 years, Maounis, 43, left to found Amaranth with 27 employees and $450 million in 2000.

The 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 former Deutsche Bank trader Brian Hunter. 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.

Controls Needed

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. It was Hunter, 32, who orchestrated the bets that triggered Amaranth's losses.

``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 Chase & Co. and Citigroup Inc. 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 13:17 EDT