UPDATE 1-Blue River muni bond fund to liquidate-sources

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By Dane Hamilton

NEW YORK, March 11 (Reuters) - Blue River Asset Management's main municipal bond fund, which market sources said previously held over $1 billion in assets, is liquidating after a harsh sell-off in the bond market, sources familiar with the situation said on Tuesday.

Blue River, however, recently raised around $110 million from investors with the help of JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) and plans to open a new domestic fund to stay in business, the sources said.

Blue River declined to comment.

Earlier this month, Blue River suspended investor redemptions in its main fund and will tell investors Wednesday about its liquidation plans, the sources said.

Blue River, one of a number of major hedge fund investors in municipal bonds, plans an "orderly liquidation" of assets over coming months, the sources said. The proceeds will be returned to investors.

It is unclear how much leverage Blue River carried. Because municipal bonds have been considered a safe investment, hedge funds could back their investments many times over with leverage until recently.

Many hedge funds were forced to sell last month to meet margin calls as the value of their assets plunged while their funding costs soared because of bond insurer troubles.