Hedge fund Vega loses big in June, screamed one of many headlines last year that sought to paint a picture of a major hedge fund manager hovering on the brink of disaster. Visiting the Vega principals in their trading house on the outskirts of Madrid last month, however, it is difficult to see what all the fuss was about. Much of the publicity was generated by media panic over the numbers coming out of the hedge fund sector in general, and speculation that this would claim a few major scalps. Vega itself recognises it had a rough time, but rumours of its demise are exaggerated, to say the least.

Much is written of the secretive firm, but it is not in the business of communicating regularly with the press. This has led to a habit of speculation in the financial media about the activities of its funds, but Vegas founder would argue that really, it is a simple business to understand, with straightforward objectives, and there is very little in the way of alchemy in what it does.

Vega was born out of the Banco Santander non-traditional asset management division, which was headed up by Ravinder Ravi Mehra. He created and developed the first Vega fund, Vega Global Macro, 10 years ago with Robert Slutz, who has been working with Ravi for nearly 20 years. During the period 1996 to 1998, he was responsible for the trading and positioning of the fund on a full discretionary basis.

Mehras background in Banco Santander was in treasury, supervising the banks regional treasuries in New York, London, and Singapore. He also sat on the banks Treasury Committee, which supervised overall market risk exposure as well as trading and investment positions. He joined Santander from HSBC in August 1990, to take up the role of New York treasurer. He was initially responsible for positioning and trading in fixed income securities, derivative products, forex and money markets, as well as the New York branchs mortgage and asset backed portfolio.

In July 1998 Mehra made the decision to take his Vega fund independent. Banco Santander remained as an investor (it helped to seed the fund, which grew its asset base from $25m to $250m within two months), and he was able to use the funds existing track record, stretching back over two years.

The hedge fund business in Spain back in 1998 was virtually non-existent, and it has not, until very recently, expanded far from that base. The year 1998 was not necessarily the most auspicious time to be starting a hedge fund enterprise, given the impact on investor confidence of the Russian debt default and Long Term Capital Management. Yet like other successful hedge fund enterprises, the year proved to be an auspicious time for Vega to go independent. Mehra held fire on actively marketing his fund until 2000, when he was able to expand its asset base to $600m.

As Vega started to appear on investors radar, the firm launched Vega Select Opportunities in June 2000. A global macro fund which primarily trades G-10 fixed income and currencies, it focuses on a limited number of positions based on the selection of best ideas generated within the organisation.

By this time Mehra had recruited Jesus Saa Requejo out of Banco Bilbao Vizcaya (BBV). He was the CIO responsible for fixed income, and a board member, of their asset management subsidiary. In this capacity, he had been overseeing the development and management of all the domestic and international fixed income investment strategies BBV was running at the time. A Professor of Finance at the Graduate School of Business at the University of Chicago, Saa Requejo researched fixed income and derivatives modelling, and consulted for a number of global financial institutions. His high pressure role at BBV made him an ideal choice to work alongside Mehra at Vega.

What is the secret of Vegas success? While retaining significant ambitions in the hedge funds space, of which more later, Vega has managed its expansion by following simple but effective criteria. It has stayed focused on the core values which stood behind its foundation in 1996, and has not diverged from these, even in the midst of last years media feeding frenzy.

First and foremost, it has used its flagship fund as an example of what it thinks hedge funds should be able to achieve: Saa Requejo points to Vega Global as a product of which he is very proud. It has a 10 year trading record. Its investors get monthly updates which are a hallmark of an unusual level of transparency in this industry. There has been little effort to conceal the way the fund has traded. In addition, there is a well-defined maximum drawdown of 6% in any one calendar year, which has proved to be a key selling point for the risk averse investor.

The launch of the Select fund in 2000 was partly prompted by a need to have a fund that could take on more risk than the relatively conservative Global. Vega Select disposed of the 6% drawdown limit, pursuing 25% returns over a five year investment horizon, with a volatility of 15-20%. It was recognised that some investors were happier with a higher level of risk in the portfolio than others.

Our investment style is fundamental macro value trading. Saa Requejo explains. If you are a value investor very often you are too early in many trades and out too soon. Because of this a lot of people think we are contrarians, but we are not. We are value traders and not trend followers. This is one of the reasons why our returns do not tend to be correlated to other managers; this and the fact that we do not like to chat too much with other managers as we do not want to be in consensus trades. The hedge fund industry emphasises too much what other people do. We have an interest in knowing which positions are crowded but not in what other managers are doing. We are also extremely risk-disciplined and transparent and, contrary to other managers, we do not believe in lock-ups.

Risk management has been a critical part of the Vega success story, and is something of a mantra with its managers. It is obviously a creed which many of its investors also subscribe to. If you take a fund like Select, Saa Requejo says, there can be situations where, if wed held some positions for 24 hours more, we could have made a killing, but thats not the point. Last year was a difficult year, but were proud of what we did: we managed to unwind 30,000 transactions without market disruption. Every trade was clean. In our funds, you get what you see. Were long term players, and what happened last year was not the first or last time that is going to happen. Ultimately, good risk management saved us a lot of money.

Vega and Vega Plus returns