UPDATE 2-Hedge fund firm GAM planning distressed fund

(Adds fund performance figures, CEO comment on Trading fund)

By Joel Dimmock

LONDON Oct 6 (Reuters) - GAM, the hedge fund firm owned by Julius Baer AG (BAER.VX), is preparing to launch a distressed debt fund of funds after watching asset prices reach "extreme levels", a company letter seen by Reuters said.

In a letter to investors seen by Reuters on Monday, GAM chief executive David M. Solo said: "We are completing a thorough review of a range of the best managers in the U.S. and Europe so as to create a diversified vehicle to benefit from this unique opportunity."

In the letter dated Oct. 2, Solo said GAM clients had been requesting a distressed fund for more than a year. That the firm is now preparing to dip its toe in the water could encourage other players in the field to feel asset prices are nearing bottom.

A source familiar with the plans indicated that a launch for the fund has been mooted for the end of this year or early in 2009, although that was subject to change. The source could give no figure for target assets under management.

Solo told investors that unlike GAM's other funds, the new product would enforce a lengthy lock-up period of about 2 years.

Julius Baer had no comment on the letter.

The company, whose shares have been under pressure, said in a statement Monday no public announcement was necessary regarding GAM or other parts of its business. "If something was not in order at Bank Julius Baer, GAM or Artio, we would have published something," spokesman Jan Bielenski said, referring to the three units of Julius Baer's business.

The launch of the distressed assets product could provide a useful fillip for the firm's fund of funds business. Last week, the Wall Street Journal reported that the division's assets under management had fallen by some 18 billion Swiss francs in the first half of the year to reach 68 billion francs.

The plans were revealed as Solo sought to reassure investors after a rough year for the hedge fund industry as redemptions and underperformance weighed on business.

GAM's funds have not been the worst performing, but still its Diversity multi-asset fund of funds showed negative returns of 3.5 percent for the three months to end-August.

The company's other flagship fund, Trading, was more resilient, down 0.84 percent over the period and Solo saw room for optimism here.

Solo said in the letter: "These highly liquid and actively traded strategies appear increasingly attractive as the number of dislocations and macro opportunities has exploded. We expect to maintain a special focus in this area through the medium term." (Editing by Paul Bolding)