Ospraie fund to close after 27 percent August skid

NEW YORK (Reuters) - Hedge fund manager Ospraie Management LLC said on Tuesday in a letter to its investors that it plans to close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources holdings.

The closure of the fund could be more bad news for Lehman Brothers Holdings Inc LEH.N, which took a 20 percent stake in the hedge fund manager in 2005.

Ospraie and Lehman both declined to comment. Lehman shares were down more than 4 percent in after-hours trading.

Ospraie said the fund, has lost 38.59 percent so far this year.

The firm said it planned to distribute 40 percent of the fund's assets to investors by September 30 and an additional 40 percent by year-end. The remaining 20 percent of the fund's assets were illiquid and could take up to three years to give back to investors, Ospraie Management said.

A person familiar with the situation said that, as of the beginning of August, the flagship fund had $2.8 billion invested. In addition, Ospraie Management still manages $4 billion in other investment funds, including a special opportunities fund, the source said.

"I think it's probably the first of more hedge fund closings to come, given that a significant majority of hedge funds have had negative performance this year," said Chris Orndorff, head of equity strategy at Payden & Rygel in Los Angeles.

"I think its another piece of bad news for Lehman which is unfortunate and it probably raises the stakes on their conversations with the Korean Development Bank," he said in reference to discussions Lehman has been having with KDB about the South Korean bank taking a stake in Lehman.

(Reporting by Paritosh Bansal and Kristina Cooke; Editing by Andre Grenon)