AMARANTH Advisors rang so many alarm bells with one sceptical London investment group that it paid extra penalties for a speedy exit last year ahead of the $6.4 billion (£3.45 billion) implosion.

Fauchier Partners, which inherited a $30 million position in Amaranth last summer when it took over a competitor, took one look at the hedge fund and demanded its clients’ money back.

In a letter to his investors yesterday, Christopher Fawcett, co-founder of Fauchier, said that his team had spotted no fewer than 11 red flags after visiting Amaranth. He wrote: “Following on-site meetings with [Amaranth]founder Nick Maounis and his team, we decided to redeem from the fund. Moreover, our concerns were sufficient to justify paying a redemption penalty for an early exit.”

In an implicit criticism of the many fund-of-hedge-funds investors that piled into Amaranth, Mr Fawcett said the problems at Amaranth were “anything but unforeseeable”.

In a comprehensive critique of Amaranth’s business model and risk controls, he enumerated the many reasons why he did not like Amaranth. “Amaranth had just about every characteristic we do not look for in a hedge fund,” he said. These included the lack of an independent third-party administrator verifying returns, insufficient risk controls and the passing through of company expenses to the fund.

High leverage, poor transparency and an hubristic management team were other unnerving signals, as was Amaranth’s well-known reliance on a single trading strategy — energy trading.

Mr Fawcett’s views carry particular weight because he is also chairman of the Alternative Investment Management Association, the representative body for hedge funds worldwide.

Funds of funds have privately argued that Amaranth’s implosion was unforeseeable and that its critics are arguing with the benefit of hindsight. However, Fauchier’s decision to pull out ahead of the collapse raises serious questions about the quality of their due diligence.

Fauchier manages $4.3 billion in hedge funds on behalf of pension funds, insurance companies, endowments and rich individuals and has established a reputation for solid returns.

The early redemption penalty was 1½ per cent of net assets on part of the $30 million withdrawal, Mr Fawcett told The Times. It enabled Fauchier to get out after three months’ notice in December 2005.

Amaranth was “a fund with bad risk management and unattractive terms for investors”, he said.

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