Blue Mountain freezes fund in face of withdrawals

NEW YORK (Reuters) - Blue Mountain Capital Management LLC has temporarily halted redemptions at its largest hedge fund after clients asked to withdraw money despite its "distinguished" performance, according to a letter to its investors.

New York and London-based Blue Mountain said in the letter it had come up with a "redemption and recapitalization plan" to protect all its investors in the $3.1 billion Blue Mountain Credit Alternatives Fund.

The fund is down 2.4 percent year-to-date, the letter said, far less than the average fund which has lost 20 percent this year. Blue Mountain has a total of $5.5 billion assets under management.

The pressure on the credit fund came from some large fund-of-fund investors, "themselves facing liquidity pressures from their own investors," submitting significant redemption notices, the letter said.

"If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors," wrote CEO Andrew Feldstein in the letter, seen by Reuters.

"Moreover, selling our most liquid positions would further disadvantage remaining investors and later redeemers by leaving them with a less liquid portfolio," the letter added.

Blue Mountain said it plans to temporarily suspend all pending redemptions from the fund and asks investors to elect by November 10 to either redeem their existing investment at a cost to them or to lock their investment up for a period of time with fees "consistent with longer lock-up periods."

Spooked by hedge funds' worst-ever returns, pension funds and wealthy individuals have been leaving hedge funds faster than ever, lawyers and managers have previously told Reuters.

Between July and September, investors pulled out a record $31 billion, which helped shrink the industry by 11 percent to $1.7 trillion.

Knight Capital Group's Deephaven Capital Management recently halted redemptions at two of its hedge funds, hedge fund firm Basso Capital told investors it was postponing redemptions and Ore Hill Partners imposed a gate in late August.

Managers argue that, if they had to return investors' money exactly when investors demanded, funds would have to unload securities at fire-sale prices and many clients who were not looking to get out would be hurt.

(Additional reporting by Muralikumar Anantharaman in Boston; Editing by Alex Richardson)