Hedge fund that invested with Madoff shutting

By Svea Herbst-Bayliss

BOSTON (Reuters) - Hedge-fund firm GMB Capital Management is shutting down a fund that lost millions on bad bets that included having putting money with accused swindler Bernard Madoff, according to sources familiar with the matter.

The Boston-based GMB Low Volatility Fund LP, which had $50 million in assets at its peak, began liquidating late last year, the sources said.

GMB Capital is run by Massachusetts Institute of Technology professor Gabriel Bitran and his son Marco.

Low Volatility Fund told investors the fund would rely partially on Bitran's complicated algorithms to deliver low volatility where prices almost never change. The fund also relied on externally managed funds.

The father and son team also funneled a chunk of money to Madoff, a financier accused last month of running a $50 billion Ponzi scheme, the sources said.

GMB Capital, which manages other portfolios in addition to the Low Volatility Fund, did not return a call seeking comment.

Nearly four weeks after Madoff's arrest, GMB Capital is the latest player in a scandal that has vaporized millionaires' fortunes, forced a handful of charities to shut down, and been linked with at least one suicide.

It has also embarrassed some of the investment management industry's brightest stars, who trusted the silver-haired Madoff without receiving real details on how he actually made money.

The sources said the Bitrans put 17 percent of the Low Volatility Fund's assets into a hedge fund of funds run by Tremont Group Holdings' Rye Investment unit. The fund's assets have fluctuated and at its peak totaled roughly $50 million.

Rye, in turn, plowed virtually all of its assets into Madoff and lost $3 billion, lawyers familiar with the matter have said.

The sources said the Bitrans knew Rye was placing the funds with Madoff.

This arrangement left many of the Bitrans' direct investors fuming because traditionally hedge funds do not rely on funds of funds as subadvisers to put their money with other managers.

Madoff's arrest was only the final straw for the already ailing Low Volatility Fund, which was down roughly 50 percent by the end of November, people familiar with the matter said.

The fund began informing investors that it planned to liquidate before Madoff was arrested in December.

Last year, the average hedge fund lost about 19 percent, according to industry researchers.