Sunday, October 17, 2004
NOW Call David Mullins at Vega!
HEARD ON THE STREET
Vega's Investors Flee as Funds Post Losses
Big Hedge Firm Stumbles After Making a Bad Bet Related to U.S. Interest Rates
By DAVID REILLY and GREGORY ZUCKERMAN Staff Reporters of THE WALL STREET JOURNALOctober 12, 2004; Page C4
So much money has flooded into hedge funds recently that some investors worry returns will suffer. Others have pooh-poohed the hand-wringing, sometimes citing impressive results at Vega Asset Management LLC, one of the hottest hedge funds around, as proof that a torrent of investor money still can come with stellar returns.
They can't point to Vega anymore.
Vega, one of the largest hedge-fund firms in the world with about $12 billion in assets, has gone ice cold. Vega bet on rising interest rates in the U.S., a logical supposition a few months ago, but one that has burned the firm.
Vega's main funds were down between 1.7% and 9.5% last month alone. The firm's largest funds now are down between 1.5% and 4.5% on the year, surprising losses for a firm that has sold itself on its steady and impressive returns, focusing on investments such as safe government bonds that often aren't as volatile as stocks. One fund is down as much as 14% since peaking in July, according to investors.
For the first time, investors are signaling unhappiness. Yesterday, Vega, based in New York and Madrid, said investor redemptions in September totaled 4% of assets -- or about $400 million -- as the firm had a second consecutive month of heavy losses.
Talk that Vega and well-known manager Ravi Mehra were having problems has worried some bond-market investors, some of whom have been concerned that the group would have to quickly liquidate trades or, even worse, wouldn't be able to exit some loss-making positions. Jon Berg, chief executive of Vega's U.S. arm, tried to dispel that notion, saying the group's funds were able to cut their market exposure "without appreciable market impact."
The group, which mainly trades government bonds, currencies and commodities, said the losses largely were attributable to a mistaken view that the price of U.S. government bonds would fall as interest rates climbed. The key 10-year Treasury has fallen to about 4% last month from more than 4.80% in the summer. Since bond prices move in the opposite direction as yields, that means prices rose, running counter to Vega's bet.
Vega's losses were exacerbated by the use of leverage, or borrowed money, that hedge funds often use to amplify returns but that also can compound losses.
Vega's Select Opportunities fund, which uses government bonds to bet on the direction of global economic trends, fell 9.51% last month. The fund, which managed $2.1 billion at the end of August, had a 4.92% decline the previous month. Vega's $4.1 billion Relative Value fund, which tries to exploit differences in the yields offered on bonds of varying maturities, fell 6.29% last month following a 4.21% decline in August.
The losses mark the end of a winning streak for Vega. It is the worst-ever monthly loss for either fund since they started in June 2000 and January 2002, respectively, according to information Vega has given investors. Another of Vega's funds, the nearly $4 billion Global fund -- its oldest and most conservative -- was down 1.68% in September. By contrast, the Hennessee Hedge Fund Indices index of 'macro' hedge funds that bet on global trends fell 0.87% for the month.
Hedge funds have had a mixed year, topping overall market indexes but grinding out low single-digit returns. Other big names have stumbled. Man Group PLC, the big British manager of hedge-fund products, saw a top fund fall 13% at one point this summer. While that fund has since regained ground, it still is down more than 5% since the start of the year.
Mr. Berg told investors in a seven-page letter that the group's performance was "disappointing" and that it was cutting back on the risk it takes in several funds. But he said that Vega had weathered similar rough patches -- in June 2002, January 1998 and August 1998 -- and had managed to recover.
A spokesman for Vega declined to comment.
Some view Vega as a symbol of the growth of the hedge-fund business and watch the firm to see how it handles all the new money. Vega trades directly with nearly 30 large banks and investment houses. As a result, problems at the firm potentially could expose its partners to losses.
The redemptions underscore how quickly the recent flood of money into hedge funds can change course. Although these lightly regulated investment pools have seen record fund inflows -- they attracted $43 billion during the second quarter -- much of the growth has come from institutions and funds of other hedge funds. These investors can be more fickle than the wealthy individuals who traditionally invested in hedge funds. Indeed, there are some signs the flood of money has slowed in recent months.
Funds of hedge funds, which group together investments in several different funds, have played an important role in Vega's growth. Drawn by Vega's relative openness with investors and the ability to invest or pull money on a monthly basis, funds of hedge funds account for about 35% to 40% of the number of Vega's investors, Vega said earlier this year. It helped the firm's assets grow to about $12 billion this spring from $5 billion the previous August.
Mr. Berg's letter stressed that the group's big asset base had no part to play in its recent slump. Vega's losses "have been solely due to having had either the wrong strategies or the wrong timing, a risk that is always present regardless of size," his letter said.
Vega also tried to convince investors that better times already may be at hand. It said that up to Oct. 8, all its funds had bounced back, with the Global fund up 1.41% since the start of the month and the Relative Value and Select Opportunities funds up 3.11% and 6.77%, respectively.
However, those figures are before the group's fees are taken out, flattening out the returns for most investors.
Write to David Reilly at david.reilly@wsj.com1 and Gregory Zuckerman at gregory.zuckerman@wsj.com2
URL for this article:http://online.wsj.com/article/0,,SB109752555332742192,00.html
Hyperlinks in this Article:(1) mailto:david.reilly@wsj.com (2) mailto:gregory.zuckerman@wsj.com
Vega's Investors Flee as Funds Post Losses
Big Hedge Firm Stumbles After Making a Bad Bet Related to U.S. Interest Rates
By DAVID REILLY and GREGORY ZUCKERMAN Staff Reporters of THE WALL STREET JOURNALOctober 12, 2004; Page C4
So much money has flooded into hedge funds recently that some investors worry returns will suffer. Others have pooh-poohed the hand-wringing, sometimes citing impressive results at Vega Asset Management LLC, one of the hottest hedge funds around, as proof that a torrent of investor money still can come with stellar returns.
They can't point to Vega anymore.
Vega, one of the largest hedge-fund firms in the world with about $12 billion in assets, has gone ice cold. Vega bet on rising interest rates in the U.S., a logical supposition a few months ago, but one that has burned the firm.
Vega's main funds were down between 1.7% and 9.5% last month alone. The firm's largest funds now are down between 1.5% and 4.5% on the year, surprising losses for a firm that has sold itself on its steady and impressive returns, focusing on investments such as safe government bonds that often aren't as volatile as stocks. One fund is down as much as 14% since peaking in July, according to investors.
For the first time, investors are signaling unhappiness. Yesterday, Vega, based in New York and Madrid, said investor redemptions in September totaled 4% of assets -- or about $400 million -- as the firm had a second consecutive month of heavy losses.
Talk that Vega and well-known manager Ravi Mehra were having problems has worried some bond-market investors, some of whom have been concerned that the group would have to quickly liquidate trades or, even worse, wouldn't be able to exit some loss-making positions. Jon Berg, chief executive of Vega's U.S. arm, tried to dispel that notion, saying the group's funds were able to cut their market exposure "without appreciable market impact."
The group, which mainly trades government bonds, currencies and commodities, said the losses largely were attributable to a mistaken view that the price of U.S. government bonds would fall as interest rates climbed. The key 10-year Treasury has fallen to about 4% last month from more than 4.80% in the summer. Since bond prices move in the opposite direction as yields, that means prices rose, running counter to Vega's bet.
Vega's losses were exacerbated by the use of leverage, or borrowed money, that hedge funds often use to amplify returns but that also can compound losses.
Vega's Select Opportunities fund, which uses government bonds to bet on the direction of global economic trends, fell 9.51% last month. The fund, which managed $2.1 billion at the end of August, had a 4.92% decline the previous month. Vega's $4.1 billion Relative Value fund, which tries to exploit differences in the yields offered on bonds of varying maturities, fell 6.29% last month following a 4.21% decline in August.
The losses mark the end of a winning streak for Vega. It is the worst-ever monthly loss for either fund since they started in June 2000 and January 2002, respectively, according to information Vega has given investors. Another of Vega's funds, the nearly $4 billion Global fund -- its oldest and most conservative -- was down 1.68% in September. By contrast, the Hennessee Hedge Fund Indices index of 'macro' hedge funds that bet on global trends fell 0.87% for the month.
Hedge funds have had a mixed year, topping overall market indexes but grinding out low single-digit returns. Other big names have stumbled. Man Group PLC, the big British manager of hedge-fund products, saw a top fund fall 13% at one point this summer. While that fund has since regained ground, it still is down more than 5% since the start of the year.
Mr. Berg told investors in a seven-page letter that the group's performance was "disappointing" and that it was cutting back on the risk it takes in several funds. But he said that Vega had weathered similar rough patches -- in June 2002, January 1998 and August 1998 -- and had managed to recover.
A spokesman for Vega declined to comment.
Some view Vega as a symbol of the growth of the hedge-fund business and watch the firm to see how it handles all the new money. Vega trades directly with nearly 30 large banks and investment houses. As a result, problems at the firm potentially could expose its partners to losses.
The redemptions underscore how quickly the recent flood of money into hedge funds can change course. Although these lightly regulated investment pools have seen record fund inflows -- they attracted $43 billion during the second quarter -- much of the growth has come from institutions and funds of other hedge funds. These investors can be more fickle than the wealthy individuals who traditionally invested in hedge funds. Indeed, there are some signs the flood of money has slowed in recent months.
Funds of hedge funds, which group together investments in several different funds, have played an important role in Vega's growth. Drawn by Vega's relative openness with investors and the ability to invest or pull money on a monthly basis, funds of hedge funds account for about 35% to 40% of the number of Vega's investors, Vega said earlier this year. It helped the firm's assets grow to about $12 billion this spring from $5 billion the previous August.
Mr. Berg's letter stressed that the group's big asset base had no part to play in its recent slump. Vega's losses "have been solely due to having had either the wrong strategies or the wrong timing, a risk that is always present regardless of size," his letter said.
Vega also tried to convince investors that better times already may be at hand. It said that up to Oct. 8, all its funds had bounced back, with the Global fund up 1.41% since the start of the month and the Relative Value and Select Opportunities funds up 3.11% and 6.77%, respectively.
However, those figures are before the group's fees are taken out, flattening out the returns for most investors.
Write to David Reilly at david.reilly@wsj.com1 and Gregory Zuckerman at gregory.zuckerman@wsj.com2
URL for this article:http://online.wsj.com/article/0,,SB109752555332742192,00.html
Hyperlinks in this Article:(1) mailto:david.reilly@wsj.com (2) mailto:gregory.zuckerman@wsj.com
# posted by Tom @ 2:22 PM 
