Gaia Capital Management's Japan-focused hedge fund, started by a former Goldman Sachs trader, lost more than three quarters of its roughly $150 million assets in just two months as the March 11 earthquake blew aside its assumptions, a letter to investors obtained by Reuters showed.

Following "the earthquake and the deterioration of the situation at the nuclear power plant that led to radiation leaks, both the index and volatility broke sharply out of their expected ranges on the 14th and 15th," Gaia Capital wrote to investors in March.

"As a result, the fund incurred heavy losses that were beyond our expectations and we had to unwind all positions in the portfolio," it said.

The GAIA J-Multi Strategy Fund, which used to be one of the larger Japan-focused hedge funds in Asia and was launched by Kenichiro Nishi, saw a 44 percent plunge in March returns as the devastating earthquake triggered panic selling in markets and forced the fund to unwind all its positions.

Nishi, who worked for Goldman Sachs between 1997 and 2003, managed about $2 billion in a Japanese convertible bond portfolio and about $3 billion for DKR Oasis before starting his Japan focused fund.

At the heart of the fund's strategy prior to the earthquake were the assumptions that the Japanese market would continue to drift in the short-term and remain rangebound within a narrow range and that liquidity in the derivative products it held would not vanish.