RAB Capital, the embattled hedge fund, has threatened to liquidate its flagship $900 million Special Situations fund unless investors agree to leave their capital locked up for the next three years.

The move comes after turbulent markets left the Special Situations fund, set up and run by Philip Richards, co-founder and former chief executive of RAB, down by 48 per cent for the year.

Last month, the portfolio, which contains small mining and early-stage natural resources stocks, lost 22 per cent of its value.

Investors are usually allowed to redeem their funds after a six-month period.

It is thought that RAB faces redemption notices from investors and is worried about being forced into a fire sale of assets.

In exchange for extending their lock-in period from the current six months, RAB is offering to slash management and performance fees from the current 2 per cent and 20 per cent, respectively, to 1 per cent and 15 per cent.

The restructure marks the latest setback for RAB, which has already issued a profits warning and suffered a sliding share price this year.

The Special Situations fund gained notoriety for its ill-fated investment in Northern Rock, the stricken mortgage lender that was nationalised in February. It is thought that RAB has written down its losses in the Newcastle bank.

Earlier this week, Mr Richards stepped down as the hedge fund group's boss to concentrate full time on the fund and his other natural resources fund.

Stephen Couttie, former chief operating officer and finance director, has replaced him as chief executive.

The restructuring move shows how the investment landscape has changed in recent months. At the end of July, two months after its profit warning, RAB told investors that the Special Situations fund was down by 23 per cent for the six months to June 30.

RAB said today that restructuring the fund would ensure that all investors were treated fairly. Traditionally, the first to redeem are likely to secure the best deal.

A spokesman said investors had nevertheless seen a return of about 17 times their money.

Investors will vote on the proposals at the end of the month, RAB said.

RAB's shares, down more than 70 per cent over the past year, were up 2.56 per cent at 30.5p today.

RAB Capital, one of the few listed hedge funds, is not alone in shutting the gate on departing investors. Last week, Ospraie Management said it would be closing its flagship commodities fund run by Dwight Anderson.

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