MatlinPatterson launches $500 mln hedge fund

By Dane Hamilton

NEW YORK, Feb 22 (Reuters) - MatlinPatterson LLC, a private equity fund that specializes in taking controlling positions in distressed companies, has launched a $500 million hedge fund in the latest example of industry diversification, a source familiar with the matter said on Thursday.

The new Distressed Opportunities Fund is the first hedge fund founded by investors David Matlin and Mark Patterson, former distressed debt specialists at Credit Suisse Group (CSGN.VX: Quote, Profile, Research) , whose fund family now approaches $4 billion in assets under management.

The fund comes as more private equity firms are branching out into hedge funds and vice versa, aiming to become diversified "alternative asset" managers to better appeal to institutional investors.

In recent years major private equity firms like Blackstone Group, Carlyle Group and Texas Pacific Group have expanded into hedge funds, while hedge groups like D.E. Shaw & Co., SAC Capital Management and others are boosting private equity holdings.

"The boundaries are getting more blurred," said Tim Selby, hedge fund attorney with Alston & Bird in New York. "Private equity firms are looking to employ hedge fund strategies while hedge funds are searching for ways to improve overall performance outside of the publicly traded equity markets."

MatlinPatterson, which often takes control of companies by buying their publicly traded debt and swapping it for equity, aims to use the "information flow and network of the firm" to find investments for the hedge fund, according to one investor who declined to be named.

The fund won't invest in the debt or equity of any of the firm's private equity control investments, this person said. In the past, MatlinPatterson has taken large positions in Huntsman Corp. (HUN.N: Quote, Profile, Research), WorldCom, NRG Energy Inc. (NRG.N: Quote, Profile, Research) and Oxford Automotive Inc. OXAU.PK.

News of the new fund was earlier reported by industry publication HedgeWorld, which is owned by Reuters.

MatlinPatterson declined to comment.