San Diego County’s pension fund was named Public Plan of the Year by a money management publication last April. Its investment returns were consistently ranked at the top of pension funds its size by Wilshire Associates, a consulting firm. It looked as if the $7.5 billion pension fund had a winning strategy for investing the retirement money of some 33,000 county workers. 

Much of the pension fund’s strategy was based on a basket of hedge funds that included Amaranth Advisors, the Connecticut hedge fund that announced Monday that it had suffered big losses in natural gas trading. Dan McAllister, the San Diego County treasurer, said yesterday that he still did not know how big the losses would be. 

“We don’t know whether this is just the tip of the iceberg, or just an isolated instance,” said Mr. McAllister, who also sits on the pension fund’s board. 

He said the pension fund’s investment of about $160 million with Amaranth had grown by 35 percent since last fall, and the board had been planning to take $60 million of the earnings out and invest them in yet another hedge fund. 

The fund’s board is meeting tomorrow, he said, but now the prospect of increased investments in hedge funds “will be the subject of a lot of discussion.” 

The pension fund had earned a reputation for innovation after it created an “alpha engine” in 1998, a portfolio device that used six hedge funds to earn better returns than the rest of the portfolio. Last year, the county added three more hedge funds to the mix, including Amaranth. That brought its hedge fund position to $1.3 billion, or a fifth of the total pension portfolio at that time —an unusually high percentage for a pension fund. 

Now that Amaranth is in trouble, though, officials at the San Diego County fund — which is entirely separate from the San Diego city pension fund, which has been the center of a funding scandal — are being reminded that the price of big returns is big risks. 

It is difficult to determine how many pension funds nationwide placed money with Amaranth, because there is no single repository of pension investment data. But a number of pension funds have begun to invest some money with hedge funds in recent years, in part to make up for losses suffered when the stock market fell in 2000 and 2001. Pension fund officials also say that they needed to diversify and considered hedge funds another asset class that they should add.

Public pension funds have also been looking for ways to meet their goal of around 8 percent annual investment returns over the long run, when more commonplace securities, like bonds, have been returning 5 or 6 percent. Governments that operate pension funds have been basing their entire budgets and tax rates on achieving pension returns of about 8 percent a year.

At the same time, interest by the hedge fund industry in managing pension money has increased smartly. The industry lobbied for an amendment to the federal pension law that would make it easier for hedge funds to handle pension money without being held to the law’s fiduciary standards. Such a provision was included in the pension measures signed into law by President Bush in August. 

Since then, the industry has been asking the Labor Department to ease the rules still further, through regulatory changes. 

“We think it’s a terrible idea,” said Damon A. Silvers, associate general counsel for the A.F.L.-C.I.O., who has been asked to address a Labor Department advisory group on the subject on Thursday. He said that he was not opposed to putting modest amounts of pension money into hedge funds but that he thought the regulatory standards should then be tightened, not reduced.

In San Diego, Mr. McAllister said that the Amaranth experience was making him wonder what other surprises might lie hidden in the fund’s alpha engine. He recalled that he had voted to expand the alpha engine last fall, but now he wanted to review the decision. As county treasurer, he said he felt he had to represent the interests of the taxpayers.

Other members of the nine-seat board include four county supervisors, three representatives of the county work force and one representative of the county retirees. Mr. McAllister said he could not speak for the others, but he wanted more information. 

“When things like this occur, it does call into question the whole structure,” he said. “Maybe knocking out the lights every year shouldn’t be the goal here. Maybe making sure that we can meet the promises that we made to the county retirees should be what we’re all about.”