By Jenny Strasburg and Aaron Lucchetti
Of THE WALL STREET JOURNAL
In 2010, Morgan Stanley (MS) helped Zoe Cruz, the co-president pushed out of the firm three years earlier, launch a hedge fund by writing her a $20 million check and expressing willingness to pour in more money later.
Last month, though, Morgan Stanley asked for its money back, disappointed by the hedge fund's performance and worried about the shrinking size of Cruz's firm, according to people familiar with the matter.
The retreat by Morgan Stanley was part of broader moves to sell off assets that Chief Executive James Gorman felt exposed the company to unnecessary risk or otherwise didn't serve clients, the people said.
(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)
On Thursday, the 57-year-old Cruz told clients in a letter that she has decided to close down Voras Capital Management.
The letter cited "the difficult capital-raising environment for new funds and the enormous uncertainty and volatility in the markets," according to a person who saw the letter. It was signed by Cruz.
"Rather than subject my investors to an unattractive risk-reward proposition, with no signs of improvement in sight, I have proactively sought to return your capital."
Cruz declined to comment through a spokeswoman. For several months, she had discussed with some investors her plans, a person close to her said.
Asset managers and banks have been in touch with Cruz about potential jobs, said people familiar with the matter.
The previously undisclosed details behind Cruz's moves show how much her longtime employer supported her re-emergence on Wall Street despite their rocky history together.
In 2007, she was pushed out of Morgan Stanley after 25 years, including overseeing some of the firm's most profitable trading desks and steadily climbing the ladder.
Cruz, whose profit-making status and management style resulted in the nickname "Cruz missile," lost her job after a unit she supervised suffered a $4 billion loss from mortgage-market bets.
Morgan Stanley shared other investors' impatience with Cruz's fund after it lost 8% in 2011 and failed to attract investors as she hoped, said people familiar with the matter.
Earlier this year, Voras Capital reported having $90 million in assets under management, compared with roughly $200 million Cruz had previously said the firm managed, according to people familiar with the matter.
A portion of the decline was due to the closing of a hedge fund that aimed to invest in distressed assets. The remaining fund made bets on broad economic trends.
Morgan Stanley's decision to put $20 million in Cruz's hands goes back to a 2009 lunch she had with John Mack, then the securities firm's CEO, according to people familiar with the matter.
Mack had fired Cruz. Yet after the lunch, he told bank executives that he would like to help her start her new investment business, according to people familiar with the matter.
Mack, explaining the decision to invest in late 2009, said Thursday: "She's been an outstanding trader and made money for the firm" over her career. Despite the "buzzsaw" Cruz and others ran into with the 2007 mortgage-market decline, he said, "her track record was a very good track record."
Around the time Mack pledged the money, Cruz was talking to some ex-colleagues at Morgan Stanley and elsewhere about joining her. She named the firm Voras after the Greek word for "north" and a mountainous region near the small town in Greece where she was born.
In her letter Thursday, Cruz said that despite losing money last year, she had "very strong views: The equity markets and U.S. Treasury yields would go up, and the dollar would collapse."
She placed trades through derivatives that would "lose some money" if her views were wrong, according to the letter.
"But if I were right, we would make multiples of the investment," it said, adding, "Unfortunately, I have no such strong convictions now."
Cruz said she has been "investing and managing risk across every asset class and every geography for three decades," and in that time learned that "hard work--no ethical shortcuts--and having a long-term horizon are ultimately the keys to investment success."