When Jack R. Meyer, former CEO of the Harvard Management Company (HMC), left the University to establish his own hedge fund with a record-setting $6 billion, investors expected him to continue his string of market-beating performance.

This past year, however, showed that even veteran investors can struggle in changing markets.

Meyer, who headed HMC from 1990 until September 2005, is credited with growing Harvard’s $4.7 billion endowment to $25.9 billion before his departure.

His success at Harvard led the University to initially invest $500 million with Meyer’s new fund—Convexity Capital Management.

But so far, Meyer’s new fund has failed to live up to the hype surrounding his record-breaking start. All of its various investment strategy options fell short of their benchmark indices by about 4.5 percent in 2006, the Boston Globe reported last Thursday.

University spokesman John D. Longbrake declined to comment on whether or not Harvard’s investment has stayed with Convexity, because the only holdings Harvard reports are those filed with the Securities and Exchange Commission.

When Meyer left for Convexity, he took with him 30 other HMC employees, including bond investors David R. Mittelman and Maurice Samuels, whose investment strategies netted billions for the University but whose large compensation packages—which topped $30 million in 2003—generated controversy.

The presence of an already proven team at Convexity helped to inspire investor confidence, even as overall investment in startup hedge funds declined by nine percent in 2006.

Meyer’s faith in his team’s ability to consistently beat the odds led him to make Convexity’s 20 percent commission on profits—a standard percentage for hedge funds—contingent on its ability to beat various benchmarks. This risky payment plan proved very expensive for Meyer and his team this year.

Analysts attribute Convexity’s lower performance to the fact that their particular style of investment, which worked well in previous years, was not a good fit for the market in 2006. Mittelman and Samuels specialize in arbitrage—investing when they noticed temporary gaps in price relationships and then profiting when the prices reconverged.

“The fixed income markets just haven’t been volatile, and that’s what they thrive on,” said Howard Kapiloff, Managing Editor of Hedge Fund Alert, a weekly publication that reported on Convexity’s shortcomings in early January.

Meyer declined to comment for this story.

—Staff writer Nathan C. Strauss can be reached strauss@fas.harvard.edu.