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Tuesday, October 17, 2006

How a hedge fund vanishes

Top Global Trader Is Suddenly Losing Investors

Ravinder Mehra built a hedge-fund empire on smart trades and savvy marketing. But sudden losses are exposing deep cracks in that empire's foundation.

The 48-year-old Mr. Mehra, for many years considered among the top traders in global bond and currency markets, launched Vega Asset Management in 1996 with just $25 million. Mr. Mehra and his team wooed the middlemen of the hedge-fund world, a rising group of professionals who represent wealthy investors and search for the next hot hedge fund. By 2004, Vega, with offices in Madrid, London and New York, was managing more than $12 billion, making it the largest fund in Europe and one of the biggest in the world.

A series of poor bets on global bonds by Mr. Mehra -- and an unwillingness to change his bearish stance on fixed-income investments -- have hurt returns. Vega's biggest hedge fund, the Vega Select Opportunities Fund, which is run by Mr. Mehra, has lost about 17% so far this year, most of it during August and September.

"You're only as good as your last trade in this business, and on that basis I am awful," Mr. Mehra says. "We deserve to be punished if we don't perform; we haven't met our objectives for two years."

The deep losses have sparked a rash of investor withdrawals. Mr. Mehra says Vega now manages about $5 billion. Some of that is money that has been invested in other funds and isn't managed by Vega's own managers, reducing the firm's compensation and making it harder to get a clear view of how much Vega itself manages. Mr. Mehra's Select fund is down to about $1 billion from more than $1.5 billon a few months ago.

Along with billions of dollars in energy losses recently racked up by Amaranth Advisors LLC's Brian Hunter, the downturn at Vega serves as a stark reminder of the risks that individual traders continue to represent at some large hedge funds, even as other funds take a more conservative approach.

Vega's losses, however, are very different from those at Amaranth, which shocked investors with the degree to which the fund moved to riskier energy trades. Vega has been open with its investors about its trades and their risk, though that hasn't made them any more accepting of the losses.

"Obviously you can't be pleased with the performance," says Andre de Gaspar, who runs AIS, a $500 million fund-of-funds firm based in Geneva, that has about 2% of its portfolio in Vega, down from 7% a few years ago. "But this isn't a case of doing things they weren't supposed to do. The position was sizable but compliant with the fund's risk budget," he says.

Mr. Mehra rose to prominence giving investors what they wanted. Mr. Mehra, who was born in India, did trading stints at Citigroup Inc. and HSBC Holdings PLC before joining Spanish bank Banco Santander Central Hispano SA in 1990. In 1996, Mr. Mehra created his first Vega fund with colleague Robert Slutz. After two years, Vega went out on its own with seed capital from Santander.

Vega attracted interest by allowing its investors to withdraw their money each month, as long as they give 30 days notice -- a more lenient redemption policy than at most hedge funds. Vega also shares the rationale and details of its big trades with its investors. Vega's risk-management techniques force the firm to dump positions after a sizable loss or if returns become very volatile, a selling point that assuaged investors.

The best-performing fund in Vega's stable, Mr. Mehra's Vega Select fund, has scored an average annual return of 12.3% since 2000. That is in line with other "macro" hedge funds, which bet on broad economic trends, though below the 25% average return he aims for. Four of Vega's five other funds have returned less than 7% a year since they began.

Some investors who passed on Vega said the firm's returns didn't justify their marked volatility. In three of the past four years, Vega experienced two-month periods of double-digit percentage losses. The firm says it has rebounded from previous big declines in 2002 and 2004 and investors are aware of the volatility.

As Vega's assets soared, Mr. Mehra cut a wide swath among hedge funds. Investors and colleagues say he entertained them with late-night dinners at some of Madrid's top restaurants. One investor recalls the firm sending a blue Porsche to pick him up on a visit to the firm's offices.

"If you join Vega and dine with me you will enjoy a lot of fine wines, I have a hell of a cellar," Mr. Mehra says.

This summer Mr. Mehra's bet against bonds became a problem, in part because the attributes of the firm that attracted investors began to undercut Vega's performance. He and his team figured that the U.S. economy would continue to expand and that inflation could be a problem, putting pressure on bond prices. But bonds rallied sharply in September. Vega's risk techniques forced the firm to exit from many of its losing positions last month -- just before the bond market headed south, a move that would have been profitable for Mr. Mehra had he held on to his investments.

"Clearly I am really frustrated," he says. "I have the majority of my net worth in the business."

Now, Mr. Mehra is trying to right the Vega ship. He is telling his investors that they now will need to give him 90 days notice before pulling out of the fund, among other moves to give him more "flexibility," he says.

For this year, however, the moves are too late. Mr. Mehra says his big fund is largely out of the market, after cutting his positions in recent weeks to keep a check on losses.

"I know I'm under the gun, I know I have to perform," he says. "But I don't see it as a catastrophe, if we get good performance we'll get traction."