Oct. 6 (Bloomberg) -- The Vega Select Opportunities hedge fund, known for making bets on bonds, received redemption requests for as much as $400 million after falling almost 11 percent last month, investors said.

Vega Select started September with $1 billion of assets, down from $2.2 billion at the end of 2004, said two investors, who declined to be identified because the information isn't public. The fund, the biggest managed by Madrid- and New York- based Vega Asset Management LLC, has dropped almost 17 percent this year, hurt by losing wagers that bond prices would decline, according to a letter sent to the company's clients.

``Clearly, we and the portfolio manager aren't pleased with the recent performance,'' wrote Michael Mann, president of the firm's Vega Securities LP affiliate in New York, yesterday in the letter. ``The Vega organization remains strong and stable.''

Vega's stumble occurred during a tumultuous month for hedge funds. Amaranth Advisors LLC, based in Greenwich, Connecticut, was forced to liquidate after losing $6.5 billion in the natural-gas market. Pirate Capital Management LLC, a $1.8 billion firm in Norwalk, Connecticut, said it would close to new clients after half of its 10-person investment staff quit.

Vega, founded in 1996 by Ravi Mehra, Robert Slutz and a team of traders from Banco Santander Central Hispano SA, oversees so-called macro funds, which try to exploit broad economic trends, primarily by trading bonds and currencies. The firm now manages about $3 billion, down from a peak of $12 billion in 2004, the investors said.

`Uninspiring Performance'

The Vega Select Opportunities Fund incurred losses during September because it was expecting fixed-income prices in the U.S., Europe and Japan would fall, Mann wrote. The Vega Global and Vega Relative Value funds also declined last month.

``Equity markets rallied, bond markets rallied, but hedge funds had uninspiring performance,'' said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds.

Hedge funds are private pools of capital that allow managers to participate substantially in the gains on investments made on behalf of clients. The funds can benefit from falling as well as rising markets.

The average hedge fund returned 0.3 percent last month, according to data compiled by Chicago-based Hedge Fund Research Inc. The U.S. benchmark Standard & Poor's 500 stock index rose 2.6 percent, including dividends, and the Lehman Brothers Aggregate bond index advanced 0.87 percent.

Fund Gains

``It's been a very challenging market given the change in the global macroeconomic environment,'' said Luis Rodriguez, head of risk management at New York-based Manhattan Family Office LLC, which invests more than $1 billion on behalf of an undisclosed wealthy family.

Not all hedge funds are struggling. Oz Europe Overseas, managed by Daniel Och, has jumped 15.3 percent this year. His Och-Ziff Capital Management Group in New York runs $14.3 billion. Timothy Barakett's Atticus Capital Inc. returned 14.7 percent in his fund that invests in stocks of companies going through corporate events such as mergers, according to data compiled by HSBC Holdings Plc's private bank. New York-based Atticus Capital manages about $9.2 billion.

Fortress Investment Group of New York, which manages $7.6 billion in hedge funds, posted a 9.7 percent gain in its Drawbridge Global Macro Fund, which invests in stocks, bonds, currencies and commodities.

Executives at Och-Ziff, Atticus and Fortress either declined to comment or didn't return a call seeking comment.

The average hedge fund rose 7.2 percent in the first nine months of the year, according to Hedge Fund Research. The S&P 500 gained 6.8 percent.

The Vega Global Fund has declined 0.5 percent this year and the Vega Relative Value Fund slipped almost 1 percent, according to the company. Losses occurred last month as the yield on the 10-year U.S. Treasury note, which moves inversely to its price, fell to a seven-month low of 4.5 percent on Sept. 25. On that day, Vega sold positions in the U.S. that were designed to profit when bond prices fell.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: October 6, 2006 03:11 EDT