Millennium Hedge Fund Running Out of Friends

Regulators have long eyed the dozens of hedge funds that reaped big profits from improper trading as potential deep pockets for reimbursing mutual fund shareholders.

TheStreet.com previously reported that Spitzer's office and the SEC advised Veras Investment Partners, another hedge fund, to set aside more than $100 million to cover the cost of a possible settlement for its role in the trading scandal. The Sugar Land, Texas, hedge fund, which is in the process of closing down, allegedly made improper trades in shares of funds sold by Fred Alger Management and Federated Investors(FII Quote).

The mutual fund investigation began last September with Spitzer's announcement that he had reached a $40 million settlement with Canary Capital Partners, the New Jersey hedge fund run by Edward Stern.

Meanwhile, the exodus of investors from Millennium could have been far worse than the $800 million that's already been taken out. Under Millennium's partnership agreements, investors are generally obliged to leave their money in the funds for a minimum of three years.

A spokesman for the fund also declined to comment on the investor withdrawals.