Ravi Mehra, who made Vega Asset Management one of Europe's largest and best known hedge fund managers, is returning to the market to capitalise on a market environment that he believes will offer one-in-a-lifetime opportunities to macro managers.
With long-time collaborator Jesús Saá Requejo, former Banco Santander star trader Mehra has announced plans to launch the Sapphire Global Fund, an EU-regulated fund that will focus on providing liquidity to a structurally illiquid market.
According to Mehra, Sapphire Global will be a three-year closed-ended fund with a global macro focus. It will seek to purchase illiquid assets from distressed sellers rather than purchase distressed assets, and will not use leverage in any of its core investments.
'Until 12 months ago, hedge fund managers could rely on easy access to leverage, credit default swaps, and numerous other OTC instruments readily provided by the big investment banks,' Mehra says.
'Many structured credit funds had 10 to 20 times cash leverage - the Bear Stearns funds being the most notable - and performed extremely well in quiet to positive markets, but they had no capacity to absorb the seismic events that were around the corner.
'The big blow-out of the investment banking model in 2008 changed everything. The access of hedge funds to leverage has now changed completely, and OTC contracts are now carefully evaluated with respect to counterparty exposure. The components which helped fuel returns before are now consider toxic, and many of the funds which needed leverage to create alpha are now ordinary in nature - if they still exist.'
Mehra says that in the new environment, leverage, risk creation through derivatives and relative value trading are all out of favour. Instead, following the Madoff scandal, hedge funds need full transparency, clear operational and governance independence, and appropriate regulation.
'The industry's successes of the future will be based on a very different set of criteria from that which served the industry well for so many years,' he says. 'Managers who can reinvent and adapt themselves will be the big winners in the new decade.'
Mehra argues that with access to opportunistic investments very dispersed and disparate, the ability to seek out investment opportunities across asset classes and geographical regions will become a core skill set.
'The focus on recognising intrinsic value in assets, due to technical illiquidity that others just ignore, will have great reward,' he says. 'The ability to buy these super-illiquid assets at once-in-a-lifetime discounts and, where appropriate, hedge out some market based exposure, will be the mantra of the new titans of the industry.'
He argues that these core skills have always differentiated Vega in the market, and explain why he is very excited about prospects over the next three years.
As Mehra himself acknowledges, Madrid-based Vega's history is one of peaks and troughs. Based in Madrid, with offices in New York, London, the Cayman Islands, Dublin and Tokyo, the firm's assets under management grew to more than USD12bn over the decade following the firm's establishment in 1996 with a team including proprietary traders from both Santander and Spanish arch-rival BBVA.
However, the firm suffered from directional investments on currencies and interest rates in 2005, resulting in the firm's only losing year since launch with the flagship Vega Global Fund down 1.5 per cent. However, last year Vega bounced back with a 9.36 per cent gain.
'Vega's capabilities and expertise has always been directly linked to its global focus on economic directions and points of inflections, identifying structural opportunities to capture value and using (and some times creating) sophisticated instruments to unlock that value,' Mehra says.
'The use of derivatives both to create risk and to gain access to particular return characteristics, from currencies, interest rates, commodities and relative value opportunities, were the hallmark of Vega's successful investment strategies.
'The understanding of credit, illiquidity and how to create liquidity was what set Vega apart in the marketplace. Even with these highly complex portfolios, during periods of significant redemptions all investors were accommodated in a highly orderly fashion - unlike many current hedge funds that are more like a 'gated community', where exit gates and lock-ups range from six months to two years.'
Mehra argues that this is one of the most disappointing features of the extensive illiquidity that exists in the current market, and he believes that Vega's new venture can help the market unlock that illiquidity.