RAB Capital, the embattled hedge fund, threatened to liquidate its flagship $900 million (£512 million) Special Situations fund yesterday unless investors agreed to leave their capital locked up for the next three years.

The threat came after turbulent markets left the Special Situations fund, set up and run by Philip Richards, RAB’s co-founder and former chief executive, down by 48 per cent so far this year. Last month alone, the portfolio lost 22 per cent of its value.

Investors are usually allowed to redeem their funds after a six-month period. Had it left the fund untouched, RAB would have faced a torrent of redemption notices from disgruntled investors. This could have forced a fire sale of assets to pay off departing investors.

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

RAB 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 RAB wrote down its Rock losses long ago. The fund has also all but written down an investment in A1 Grand Prix, a rival to Formula One racing that has tumbled in value.

This week Mr Richards – the R in RAB – stepped down as the hedge fund’s boss to concentrate on the fund and his other natural resources fund full-time. Stephen Couttie, formerly chief operating officer and finance director, has taken the helm at the hedge fund.

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

RAB said yesterday that restructuring the fund would ensure that all investors were treated fairly. Traditionally, the first to redeem their funds would be the most likely to secure the best deal. A spokesman said that investors had still 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 virtually flat at 29p.

Last week Ospraie Management said that it would be shutting its flagship commodities fund run by Dwight Anderson.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax