A Connecticut hedge fund trying to survive after admitting to investors that it lost billions of dollars in the flagging natural gas market has transferred its energy portfolio to a third party.

Greenwich-based Amaranth Advisors told investors this week that its dealings in the natural gas market -- where prices are more than 50 percent lower than a year ago -- are expected to cause the hedge fund to lose 35 percent of its assets. The company, which opened the year with $7.4 billion, saw assets shrink to about $4.5 billion from an August high of $9.2 billion.

First - what is a hedge fund?  A hedge fund is essentially a mutual fund that is not subject to SEC regulation.  A mutual fund sells shares to the general public.  Therefore it is subject to federal securities laws regarding what facts it must disclose.  In contrast a hedge fund is an investment pool that accepts money from high net worth individuals.  In addition hedge funds have a much broader investment criteria - they can invest in whatever financial assets the fund manager thinks will make the highest return.

Hedge funds are usually started by the latest investment hot shot - someone who has recently made a great deal of money in the market and who then sells that reputation to investors to gain more money to invest.

There is nothing inherently wrong with hedge funds.  However, hedge funds have a reputation of being more aggressive in their investments.  For example, they will allocate a larger percentage of their portfolio to a specific asset class.  Here, Amaranth allocated bet big on the natural gas market and lost.  That's the central problem.

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Amaranth is getting hit by the general pullback in commodities prices.  Commodities are the 2000s version of tech stocks in the 1990s.  A recent International Monetary Fund Report indicated the amount of money in the commodities markets has swelled in the last 5 years.  Now some of that money is leaving the market:

Up to $12bn may have been taken out of commodities by investors over the past month, JPMorgan said on Monday.

The outflows came amid a retreat in commodity prices as concerns increased about a slowing US economy and the knock-on effect of easing demand for raw materials.

The investment bank said the gold price could be the most vulnerable to further selling, while crude oil prices were showing signs of support at current levels.

John Normand, global currency, commodity and fixed-income strategist at JPMorgan, said the $12bn of outflows was small relative to the total inflows into commodity index products over the past five years - about $100bn.

But he said it was high relative to the amount that had entered through retail mutual funds this year - $19bn, according to JPMorgan's internal database of about 250 funds.

There are some big people getting hit by Amaranth losses

The sudden collapse of Amaranth Advisors LLC, a Greenwich, Connecticut-based hedge-fund manager, left clients including 3M Co. and the San Diego County retirement fund with potential investment losses.

Investors in Amaranth included fund-of-funds managed by Wall Street banks including Goldman Sachs Group Inc., Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, according to U.S. Securities and Exchange Commission filings.

Morgan Stanley's $2.3 billion Institutional Fund of Hedge Funds had about $126 million, or 5.48 percent of its assets, invested in Amaranth as of June 30, according to regulatory filings. Goldman Sachs Dynamic Opportunities Ltd., a London-based fund that invests in other hedge funds, yesterday said losses from an investment whose description fits Amaranth would cut as much as 3 percentage points off its return this month.

Max Re Capital

Max Re Capital Ltd., a Bermuda-based reinsurer, may also be a casualty. The company said today third-quarter earnings will be reduced by $35 million because of losses from hedge-fund investments. Max Re didn't disclose which hedge fund caused the losses, and spokeswoman Sheila Gringley didn't respond to a phone message seeking comment.

Shares of companies in which Amaranth invested have also been hurt.

The stock of Cinram International Income Fund, a Toronto- based maker of digital-video discs, fell 5.4 percent earlier this week on concern that Amaranth would sell its 15 percent stake. The shares rose 62 cents to C$22.22 at 11 a.m. in Toronto after the Globe and Mail reported Amaranth had received bids for its holdings.

Here's another list from Reuters

PERCENT OF FILING INVESTOR STAKE ASSET DATE Morgan Stanley $123.6 million 5.48% June 30 Institutional Fund of Hedge Funds LP Morgan Stanley-backed $2 million 6.41% March 31 Alternative Investment Partners Absolute Return Fund BNY/Ivy Multi-Strategy $9.4 million 5.86% June Hedge Fund LLC MAN-Glenwood Lexington $9.9 million 5.74% June 30 Associates Portfolio LLC DB Hedge Strategies Fund LLC * $3.6 million June 30 Mercantile Absolute $4.6 million 8.38% March 31 Return Fund LLC Goldman Sachs Hedge Fund $28.9 million 5.62% Dec 31 Partners II LLC Credit Suisse $1.2 million 12% March 31 Alternative Capital Relative Value Fund, LLC Credit Suisse $6.87 million June 30 Alternative Capital Multi-Strategy Fund * Fund was in liquidation

We'll have to wait and see how this plays out in the bigger  picture.