Hoping to avoid the fate of cross-town rival John Arnold, who gave back $1 billion of capital last year after posting his first annual decline ever, Coolidge told investors this week that the transfer would occur on the first trading day of April. One investor estimated the refund at about $400 million.

The relatively rare move to push back funds comes as $2 billion Velite extends last year's stunning gains, rising more than 15 percent through February as U.S. natural gas prices extend a months-long slide to their lowest in a decade.

While Coolidge offered no detailed explanation of the move to return some cash, traders say it can be tricky for growing hedge funds to maintain their strategies and performance in a market as relatively small and isolated as U.S. natural gas. With prices slumping, funds also need less capital to trade.

"We have had extensive internal discussions relating to our level of assets under management ("AUM") that we think would allow us to trade most efficiently," Coolidge, a two-decade veteran of the gas market and avid Texas Aggies fan, wrote in his March 27 letter, a copy of which was obtained by Reuters.

"We feel that this distribution is in the best interests of the fund and its investors. We hope our investors will continue to be supportive of our decision to reduce our AUM."

A Velite executive declined to comment.

After topping the league tables with a more than 50 percent gain in 2011, Velite's assets swelled to about $1.4 billion at the start of the year. Assets now stand at about $2 billion after Coolidge's bearish bets continued to pay off, sources say.

One fund of funds executive that invests in Velite said Coolidge had about $400 million of his own money in the fund. That would put the investors portion at $1.6 billion, meaning the amount to be returned would be about $400 million.

"It's a good thing they are doing," said the official. "We seldom see managers returning money on their own unless they face redemption demands."

He added that his firm will be reallocating "at least some of the returned money" to other funds in the energy and commodities space.

Another natural gas fund manager added: "I think there's going to be some jostling among others in the business to try and get their hands on some of that money."

Vast new reserves of shale gas have turned the U.S. market on its head in the past few years, promising a long-lasting supply surplus that has cratered prices and tempered the volatility on which many traders prosper.

Coolidge, who turns 47 this June, has made an indelible mark on the clubby Houston energy-fund world by correctly betting on the deepening slump in prices.

Velite gained 33 percent in its 2006 debut as U.S. benchmark Henry Hub gas prices fell 44 percent; in 2009, it jumped 72 percent as prices tested new lows. His weakest year was 2010, yet Velite still eked out a gain of more than 2 percent.

Legendary ex-Enron trader Arnold also found it difficult to continue outperforming in a small market as his fund swelled and new regulations put tougher limits on speculators.

In 2011, after his first ever annual loss of 4 percent, Arnold returned about $1 billion of investors' capital in Centaurus Energy. The fund gained less than 10 percent last year, although at $4 billion Centaurus remains by far the biggest and most successful natural gas-oriented fund.

(Additional reporting by Bruce Nichols; Editing by Ed Davies)

• A Permanent Economic Emergency