Vega: New Look for European Giant

Behind one of Europe's most successful hedge fund organisations

Stuart Fieldhouse
2

"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 Vega's 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.

Mehra's background in Banco Santander was in treasury, supervising the bank's regional treasuries in New York, London, and Singapore. He also sat on the bank's 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 branch's 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 fund's 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 Vega's success? While retaining significant ambitions in the hedge funds space, of which more later, Vegahas 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 year's 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 we'd held some positions for 24 hours more, we could have made a killing, but that's not the point. Last year was a difficult year, but we're 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. We're 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
 
  Global RV Select Liquidity Nile
APR since inception as of May 06 7.45% 7.52% 16.94% 4.96% 27.41%
Twelve-month rtns (including June '06 estimate) 7.21% 5.69% 9.85% 5.86% 31.38%
Twelve-month rtns up through end of May '06 3.42% -0.35% 3.24% 5.73% 34.32%
Jun 06 19,908.42 0.01% 13,706.73 -0.50% 25,524.30 -0.20% 111.93 0.46% 13,351.46 -0.26%
May 06 19,906.43 0.08% 13,775.61 1.31% 25,575.45 0.59% 111.42 0.58% 13,386.26 -1.69%
Apr 06 19,890.12 0.61% 13,597.29 1.04% 25,426.60 -1.12% 110.78 0.84% 13,616.24 3.57%
Mar 06 19,770.09 0.75% 13,456.82 0.93% 25,713.39 0.12% 109.85 0.75% 13,147.12 3.40%
Feb 06 19,622.29 0.49% 13,333.12 -0.80% 25,682.47 2.40% 109.03 0.36% 12,715.00 0.53%
Jan 06 19,526.79 1.27% 13,439.97 0.20% 25,081.58 0.10% 108.64 0.47% 12,647.35 9.37%
Dec 05 19,282.63 0.52% 13,412.89 0.62% 25,055.37 -0.48% 108.14 0.30% 11,563.47 2.59%
Nov 05 19,182.89 0.74% 13,329.71 0.02% 25,176.61 0.21% 107.81 0.26% 11,271.67 6.29%
Oct 05 19,041.28 0.17% 13,326.85 1.26% 25,124.91 1.82% 107.53 0.27% 10,604.57 -8.47%
Sep 05 19,009.06 1.22% 13,160.81 0.32% 24,675.78 3.34% 107.24 0.50% 11,585.28 4.24%
August 05 18,780.56 0.81% 13,118.71 0.81% 23,878.53 0.66% 106.71 0.52% 11,113.63 4.52%
July 05 18,630.28 0.32% 13,013.01 0.34% 23,721.12 2.09% 106.16 0.40% 10,632.68 4.62%
June 05 18,570.34 -3.52% 12,968.72 -6.19% 23,235.77 -6.20% 105.74 0.34% 10,162.85 1.97%
May 06 19,247.58 13,824.66 24,772.27 105.38 9,966.25
Vega and Vega Plus returns, cont.
 
Linnaeus Anglian Nayan Anak EU Class A Modus Element Em Alpha Elcano
8.22% 9.96% 5.64% 6.76% 5.54% 12.43% 9.35% 7.54%
18.23% 3.17% 6.16% 4.71% 7.19% 15.56% 8.54% 6.07%
14.09% 15.76% 6.27% 6.76% 14.20% 18.10% 8.54% 6.07%
10,905.01 0.53% 10,847.17 -9.95% 11,219.95 -0.21% 118.66 -0.89% 10,835.14 -2.28% 11,240.32 -1.96% 10,853.71 0.75% 10,606.51 -0.17%
10,847.52 -1.93% 12,045.72 0.69% 11,243.56 1.24% 119.72 -0.94% 11,087.95 2.63% 11,465.03 -1.12% 10,772.91 -0.02% 10,624.57 1.20%
11,060.60 0.38% 11,963.70 -4.48% 11,105.82 1.83% 120.86 0.77% 10,803.48 3.15% 11,594.79 2.95% 10,775.57 2.08% 10,498.37 0.79%
11,018.60 -3.88% 12,525.07 5.82% 10,906.58 -1.12% 119.93 1.67% 10,473.09 2.85% 11,262.56 0.75% 10,556.16 -1.20% 10,416.52 1.11%
11,463.40 -5.05% 11,835.68 -0.68% 11,029.76 0.43% 117.97 1.78% 10,182.43 -3.71% 11,178.62 1.28% 10,684.11 0.98% 10,302.29 0.14%
12,072.71 2.65% 11,917.23 4.75% 10,983.04 0.77% 115.91 0.21% 10,575.13 1.45% 11,037.42 1.39% 10,580.94 0.87% 10,287.56 1.36%
11,761.13 6.09% 11,377.35 6.01% 10,899.12 1.12% 115.67 0.30% 10,423.92 -0.44% 10,886.22 1.11% 10,489.91 0.81% 10,149.51 0.55%
11,085.57 7.91% 10,732.61 5.68% 10,778.36 0.62% 115.33 0.26% 10,469.60 0.38% 10,766.88 0.91% 10,405.38 2.05% 10,094.43 0.06%
10,272.87 -1.34% 10,156.02 -2.01% 10,711.54 1.57% 115.03 -0.77% 10,429.60 3.09% 10,670.27 2.35% 10,196.13 0.00% 10,087.96 0.39%
10,412.44 6.84% 10,364.19 -0.98% 10,546.00 -0.28% 115.92 0.83% 10,116.98 2.23% 10,425.28 4.28% 10,196.19 1.93% 10,048.94 0.24%
9,745.45 4.54% 10,466.82 0.32% 10,575.93 -0.27% 114.97 0.49% 9,896.30 1.72% 9,997.36 -0.95% 10,003.29 0.03% 10,025.37 0.25%
9,322.11 1.07% 10,433.90 -0.76% 10,604.38 0.34% 114.41 0.95% 9,728.96 -3.75% 10,093.31 3.77% 10,000.00 10,000.00
9,223.62 -2.99% 10,513.79 1.04% 10,568.65 -0.11% 113.33 1.05% 10,108.07 4.11% 9,726.67 0.19% n/a n/a
9,507.72 10,405.82 10,580.60 112.15 9,709.03 9,707.79    

Vega kept its investors up to speed as it navigated choppy waters. Its convictions remained the same. When risk management criteria dictated that positions be cut, then positions were cut. Running large macro funds, it had the luxury of being able to unwind positions quickly when required. If money was lost, it was lost through poor timing in trading decisions, not through bad risk management or because the funds held illiquid positions.

Vega Select Opportunities has an annualised return of 17.08%, and an annualized volatility of 13.91%. It is a high risk fund. Vega Liquidity, on the other hand, launched in 2004, maintains a maximum drawdown of 2% and liquidity of T+2. As such, it has an annualised return of 4.87%. The other Vega fund, Vega Relative Value, is a fixed income relative value fund that was launched in January of 2002. The firm has a close understanding of the relative levels of risk it can carry in its various portfolios. This requires a minute and concerted monitoring of the various trades it has on at any one time within its macro strategies.

The firm is very clear about the sort of risks it will take on, and what it will avoid. For example, Mehra and Saa Requejo are against the use of leveraged shorts unless they are used in a disciplined fashion. They are also cautious about the way options are used in their portfolios, as they want to be sure that they can close their positions in a disciplined fashion and on a regular basis. They see themselves as pure value investors, and are averse to charting. There is nothing of the infamous 'black box' in the way Vega goes about managing its funds.

"In the second half of last year there were some people upset with us because they thought we were not taking enough risk," says Saa Requejo of last year's travails. "That was a very frustrating time." Given that Vega Global manages its drawdown on a calendar year basis, it found itself in the second half with little ability to take on risky trades, leaving its managers with less room for manoeuvre, but with a new year comes a new risk budget, and new opportunities that simply would not have existed for the fund in the autumn. Vega is now at an important stage in its ongoing development as an investment manager. Several key decisions have been taken that will dictate its future as one of Europe's leaders in hedge fund management. Like other firms of a similar scale on both sides of the Atlantic, there has obviously been plenty of thought given as to where the business is heading. Mehra, the firm's founder, is more than content to provide "spiritual leadership" while concentrating his efforts on the management of the flagship macro funds. Saa Requejo is overseeing the trading desk on a day-to-day basis. It is a firm that has matured over time, and has passed many of the challenging hurdles in a hedge fund business' development, like boredom and burn-out. Vega's principals have a passion for trading, they enjoy what they do. If they were not overseeing the future of billion dollar global macro portfolios, they would be trading their own assets regardless. For them, it is a way of life.

The creation of the VegaPlus platform Vega is far more than just a Spanish hedge fund outfit. It is also an international operation, with offices in London, and New York. It is also more than just global macro funds, having launched a range of funds across various strategies on its VegaPlus platform, drawing on the established talents of managers from within and from outside the Vega organisation.

The success of the Vega platform can be partly attributed to the success of its US subsidiary, which markets all the Vega funds in North America. The US business was headed up by Jon Berg, who was effectively the face of Vega for the firm's investor base, and helped to build up its considerable asset base and standing in the hedge fund community. He retired from the firm early in 2006, leaving Michael Mann, head of marketing in the US, to spearhead operations on that side of the Atlantic. Berg is continuing to serve the business as an external consultant, while the global CEO spot has been filled by Carlos Garcia de Juana in Madrid. Mann leads a top-notch marketing team in New York, including Doug Ross and Bill Best handling US clients, Bob Wood covering South America and Jaz Singh selling to the Middle East.

According to Michael Tobin, managing director responsible for North American institutional sales and business development, building up Vega's asset base has taken years of hard work. "We definitely have a long-term focus," he says. "We were set back a bit by last year's performance, but I spent 190 days on the road last year meeting clients. We used a lot of candour in our meetings with them, we explained the investment thoughts of the manager, their process. It doesn't reassure people if you clam up or communicate cryptically in situations like that. It takes a long time to build up a relationship – there's no such thing a closing a deal in this business."

Mann and his team have built up a network of major clients in the US, drawing heavily on the high net worth market and the endowments sector. Their formula has been one of staying in touch with the client base, making themselves available when investors are in New York and want to see them. "One of the problems with hedge funds is that they are taking on a role traditionally served by the old investment firms," Tobin explains. "Once upon a time it would have been unthinkable for a firm like Vega to be managing money for one of the largest pension funds in the world. Now you get relatively young firms managing a huge portion of their assets – one client of mine has 40% invested with hedge funds."

The VegaPlus Platform grew out of Mehra's desire to attract high calibre traders to the Vega organization, originally to deepen and broaden the trading team and increase the diversification of trade ideas within the Vega Global Fund. But because one of the core beliefs of the Vega organization is that trading is an entrepreneurial activity and that great traders are entrepreneurial by nature, management knew that in order to attract the best talent they had to offer more than the opportunity to trade an allocation of capital for its core funds. The best traders wanted the opportunity to trade their own funds, so Vega pursued traders with the idea that they could establish their own independent funds which would be supported by Vega's extensive infrastructure, which includes risk management systems, operational procedures and controls, middle office processing and reporting, compliance programs, legal and regulatory support, and marketing services.

Vega has proven very successful at finding investment talent, seeding them, and taking them to market. Vega has expanded the menu of funds on offer to 16 – at Vega and VegaPlus – thus far, and looks set to create more. The strategies on the VegaPlus Platform currently include global macro, commodities, emerging markets, fixed income relative value, equity market neutral, and equity long/short. It is constantly on the hunt for talent, and uses its own trading desks as a means of assessing potential future fund managers while they are still supporting one or more of the existing portfolio managers.

"Either you have talent you grow yourself, or you bring in teams of people with a well established track record. It is the middle way where mistakes get made," says Jesus Saa Requejo. "We like to get to know how they think, know their talents, while they are on the trading desk. Some will want their own funds, others will be happy to continue to work with us as traders."

The firm has found itself starting to compete with other large European hedge funds for investment talent, whereas previously it only had the big US shops to worry about. The important factor is their ability to fit in with the risk aware Vega culture, and to function as part of its team of traders. "In the future, we will continue with the same model," says Saa Requejo. He sees the successor to the

VegaPlus platform, Proxima, as the means by which the firm can continue to bring new funds onto the market, and create the sort of multi-strategy products that will find a ready audience amongst institutional investors. Vega's institutional client relationships are developing to the point where the firm has been able to create customised products, or create co-investments, driven by the dialogue it has with major hedge fund investors. It is this readiness to listen to clients, coupled with its scale, and a readiness to find new investment talent, that is allowing Vega to expand its range of funds, adding vehicles that not only have sharp investment brains running them, but are also likely to find a ready group of investors. Up until recently, it has been using the VegaPlus platform to help these managers bring their new funds to the market. All that is about to change.

Proxima

This summer sees the VegaPlus platform enter a new growth phase, following the announcement of a joint venture between Vega and BBVA. The JV sees Vega retaining 49% of the successor to VegaPlus, called Proxima, a major new Spanish hedge fund platform initiative with international ambitions. Up until this year, VegaPlus had been used as the central operational platform for the management of existing funds, and the launch of new ones, both those being tested internally, and those being actively marketed externally.

"Vega had been successful with its funds, but we wanted to make our infrastructure more available to other managers," says Carlos Garcia de Juana, Vega's CEO. "It was a big task for us to undertake on our own, so we went in search of a strategic partner who could handle the day-to-day management and the business processes."

It found its partner in the form of Spanish bank BBVA, which has put a further $1 billion into the funds on the platform. Vega and BBVA have a long-standing relationship, and both were aware that with Spain's financial regulator openly considering a new regime for hedge funds, the time had arrived for a venture of this sort. BBVA wanted a leadership position in the Spanish hedge funds market, Vega was by far and away the largest local hedge fund player, with a global brand, and a 10 year business record. It was a natural match.

BBVA's participation gives Proxima the benefit of a major distribution network coupled with blue chip institutional backing, in a similar way to the support SocGen has given the Lyxor platform in France. By using the VegaPlus platform as the foundation stone for Proxima, BBVA has been able to launch the business from a cash-positive position, and can hit the ground running. Future Vega launches will be carried out using the Proxima infrastructure, and plans are also afoot to develop and seed internal Proxima funds, as well as indices andfunds of funds.

"Proxima will be run independently," says José Barreiro Hern ández, Managing Director for Global Markets and Corporate & Investment Banking at BBVA in Madrid. "The partners will contribute their expertise. The other important factor is that Proxima will be based in Madrid, it will be regulated here in Spain."

Spain's regulator, the Comisión Nacional del Mercado de Valores, has a tough reputation, and Barreiro is confident that this will augment its appeal for investors.

"When we decided to set up in Spain it was not purely for geographical reasons," says Vega's García de Juana. "It was also because the regulator is tough. Any asset management activity in volume needs strong operational and internal controls, and thus the supervision has to be reliable. We want to ensure future growth is supported by good infrastructure, by paying close attention to operational risk, and inculcating robust business processes. Proxima will have its own risk control department, and the funds will enjoy a high degree of best practice."

This is not simply a domestic project: other offices will be opened in London and in New York where VegaPlus has existing operations, and where VegaPlus staff will be moving over to Proxima. "Spain is going to be important for Proxima, because there is going to be a lot of growth here," García de Juana says. "Spanish institutions command a strong share of the pension market in Latin America as well." Clearly, the new venture also has global ambitions.

Heading up the Proxima venture is Dídac Artés, former Director of Global Markets at BBVA in 1999-2001, who has been acting as an independent consultant for a number of banks and financial institutions in Spain and Portugal in the last few years. His career has also encompassed senior positions at Banco Santander and Bankers Trust in Madrid and London, and with Chase Manhattan in Madrid, Milan, and New York, where he worked in capital markets and treasury. The choice of Artés was based on his background as a trader: Vega and BBVA were looking for someone who could speak the same language as hedge fund managers, but at the same time, having worked in a large banking organisation, be sensitive to the operational and risk management priorities that running a platform like Proxima involves. "Dídac knows how to get a big business moving," says García de Juana. "But he is also able to operate independently. A job like this requires a certain dynamism that in a full banking organisation might not be easy to get."

Artés has been tasked with spearheading the Proxima launch, and overseeing its ongoing development. In his new role he is already responsible for a business supporting $3 billion in investments, set to grow rapidly as the climate for hedge funds changes in Spain, and BBVA's obvious distribution strength starts to tell.

"The changing Spanish regulations were the catalyst," he explains. "The possibilities for a business of this sort became obvious, especially once the regulations emerged that would help to safeguard investors' interests. BBVA has been investing in hedge funds on a proprietary basis, and is also involved in the fund of funds and structured products business. Proxima completes the value chain for the bank."

Proxima's opening USP is the access it can already provide to the Vega range of funds, coupled with a superior, institutional-quality best practices environment. "These are the two legs on which we plan to build the business," says Artés. "Our platform will appeal to people looking to get a foothold in the market. BBVA is demonstrating its confidence in the platform by putting its money where its mouth is. Investors should look at the Proxima platform as a safe alternative, run with the best practices currently prevailing in the industry."

His plans for the future are ambitious,embracing a range of different types of products, ranging from funds of funds to indices, structured products to onshore funds. With the EU also liberalising its regime for the distribution of onshore retail products, he is hoping Proxima will be positioned to support a wide range of different investment managers, from the esoteric hedge fund to the more prosaic absolute return strategy that could be distributed via wholesale banking networks.

On top of that, keeping one eye on the domestic situation, Proxima may also be positioned to help boost growth in domestic Spanish trading talent, up until recently the preserve of the big banking organisations. Vega has tended to seem out on its own in Spain's hedge fund community, but a facility like Proxima, coupled with a more proactive regulatory regime, could well encourage Spanish investment managers to take the plunge and launch their own funds.