Not long ago, John Devaney, CEO of Key Biscayne, Florida–based United Capital Holdings, entertained grand visions of turning his $620 million hedge fund and asset-backed brokerage into an investment banking empire (Institutional Investor, June 2007.) Now Devaney, 37, is battling to keep his two-year-old hedge fund business alive.

The hedge fund maven’s bold plan took a turn for the worse in mid-June, when he suffered serious losses on a subprime mortgage derivative index that plummeted in value following the implosion of two Bear Stearns hedge funds. Nervous backers — including an institutional investor holding a quarter of total assets — demanded their money back.

Devaney declines to comment, but a United Capital spokesman says the trader refused the redemption requests, warning investors that dumping assets into a depressed market would result in far lower prices than they could gain by selling over time. In a statement, the company said it is working with its lenders, and United’s spokesman says Devaney has $145 million in cash to meet margin calls, as well as approximately $80 million of his own net worth invested. He is no longer trading the ABX, the volatile derivative index that took down the Bear Stearns hedge funds and contributed to losses of $124 million at New York–based Dillon Read Capital Management, a hedge fund unit of UBS that had $4.8 billion in assets.

In May, Devaney acknowledged that “some investors are extremely scared by the recent price action and volatility of this new index product,” adding, “I should do well in this environment.”

The trader has crashed and bounced back before. “John has an amazing ability to rebound, and after a while, he turns mistakes into huge opportunities,” attests former brokerage client Olivier Cojot-Goldberg, vice chairman of $29 billion money manager Ellington Management Group, which itself almost collapsed in 1998 after the mother of all hedge fund disasters, the implosion of Long-Term Capital Management.

Interviewed before United Capital’s funds went south, one rival mortgage trader at a hedge fund said of Delaney: “John is smart, with a big heart and an amazing Horatio Alger tale. But he’s wild and is destined to go up and down. Hitting rock bottom may be a good thing for him.”