Aug. 23 (Bloomberg) -- HRJ Capital LLC, the investment firm whose partners include retired football players Joe Montana and Ronnie Lott, said one of its funds lost 12.3 percent in the first two weeks of August, erasing most of its 2007 gain.

HRJ, based in Woodside, California, blamed the decline in its Legends Multi-Strategy Plus Fund on losses as the subprime- mortgage crisis spread to broader credit and equity markets. The investment pool farms out clients' money to hedge-fund managers. HRJ, which also invests in real estate and private-equity funds, oversees $1.75 billion.

``The first two weeks of August have brought about an extremely difficult market environment for several of the Legends Funds' managers,'' HRJ said in an Aug. 22 letter to investors obtained by Bloomberg News. ``What changed in August was the apparent de-leveraging of quantitative equity market neutral funds as a source of greatest liquidity when there was none to be had in equity portfolios.''

The firm's Legends Multi-Strategy Plus Fund, known as a fund of hedge funds, had risen 12.4 percent through July, according to a July client update. The firm's hedge-fund investment decisions are managed by Jennifer Coffey, who joined HRJ in July 2006.

Spurred by mortgage-market turmoil, the Standard & Poor's 500 Index lost 6.7 percent in the month ended Aug. 17, including the biggest one-day drop since February on Aug. 9. At the same time, the benchmark for U.S. stock-market volatility -- known as the VIX -- doubled to the highest level since April 2003.

`Quant' Troubles

So-called quantitative hedge fund funds run by firms including New York-based Goldman Sachs Group Inc. and Highbridge Capital Management LLC have declined this month as widening credit spreads and volatile stock prices jarred their trading models. Quant funds use computer programs to find anomalies in prices for stocks, bonds and currencies and commodities and to time trades to profit from them.

Even before those losses, hedge funds worldwide returned 0.45 percent in July, their worst month in a year, according to a monthly industry survey by Chicago-based Hedge Fund Research Inc. This month, funds in Hedge Fund Research's HFRX Index, calculated daily based on a smaller sampling of investment pools, lost 4.49 percent through Aug. 21.

Players, Partners

Lott, 48, a former defensive back with the San Francisco 49ers of the National Football League, is a founder and managing partner of HRJ, formerly known as Champion Ventures, according to its Web site. Montana, 51, who was a quarterback for the 49ers and the Kansas City Chiefs, is an equity partner in the firm. Harris Barton, 43, another HRJ founder and managing partner, also played for the San Francisco team.

Montana, whose first name accounts for the ``J'' in HRJ, invested in the firm beginning in 1999, when it primarily catered to professional athletes. Montana was involved mostly in the firm's real-estate investment business as an HRJ managing partner until he gave up his role in day-to-day operations two years ago. Lott and Barton both were private-equity investors while they played football and provide HRJ with a network of buyout-firm and hedge-fund contacts, according to the Web site.

Coffey previously helped oversee hedge-fund investments in the asset-management unit of Credit Suisse Group. She was traveling today and unavailable for comment, said Kristine Nesslar, an assistant.

HRJ's managing directors responsible for general financial and investment operations for the firm are Ed Rodden and Jeffrey Bloom. Bloom, the chief financial officer, joined HRJ in 2001 and previously was a partner with Palo Alto-based law firm Wilson Sonsini Goodrich & Rosati.

Farallon, Tudor

HRJ's Legends Plus Fund is a more-leveraged version of its Legends Multi-Strategy Fund and has money with Tudor Investment Corp., Farallon Capital Management LLC, D.E. Shaw & Co. and 16 other hedge-fund managers, according to the update. The Plus Fund, which started investing in October, uses $1.90 in borrowed money for every $1 in client money invested in the Legends Multi-Strategy Fund.

D.E. Shaw's multistrategy composite fund declined 7 percent this month through Aug. 17, according to an investor.

``We work with a great group of hedge-fund managers,'' John Micek, head of business development, said today in a phone interview. ``Historically, they've performed well over multiple market cycles. We remain extremely confident in the current portfolio.''

Spokesmen for San Francisco-based Farallon and Tudor of Greenwich, Connecticut, declined to comment. D.E. Shaw spokesman Trey Beck didn't return a call.

The Plus Fund targets a 15 percent annual return. It gained 10.6 percent in its first three months, October through December, according to the July update.

Trailing S&P 500

The lower-leverage Legends Fund, which started in February 2003, returned 10.3 percent last year, within its stated target return of 8 percent to 12 percent. That performance trailed the 15.8 percent gain last year of the S&P 500, including dividends reinvested, and the 13 percent average gain by hedge funds globally, according to Chicago-based Hedge Fund Research Inc.

The regular Legends Fund returned 7 percent through July 31.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Industry assets have almost tripled to $1.7 trillion since 2002.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net.

Last Updated: August 23, 2007 17:40 EDT