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Millennium Hedge Fund Putting Up Legal Reserve

"They were the elite group, the top 10 or 20," the investor said. "They didn't publicize themselves, but everybody in the industry mentioned them on various occasions."

With a 30.66% return in 2000, a 15.6% return in the dismal days of 2001, a 9.62% return in 2002 and a 10.89% return last year, the offshore fund was a bright spot for investors who lost money in the equity markets.

As large institutional investors began to look more closely at hedge funds during those years, Millennium revamped its agreements with investors, toughening restrictions on withdrawals.

Because hedge funds can have volatile stretches, particularly in times when markets are shifting, provisions -- or gates -- that keep investors from redeeming all their shares on short notice are common, said Ron Geffner, head of the financial services practice at New York law firm Sadis & Goldberg.

"These gates often vary from fund to fund depending in part on the strategy, with an eye to the liquidity and volatility of the portfolio," he said. "They are designed to prevent a run on the bank, by investors who may panic and could cause unnecessary fluctuation in the returns the fund would generate. Gates are not such a bad thing -- they're not just designed to protect the manager."

However, that's just what Millennium's restrictions are doing: shutting up its largest and most recent investors' money for a minimum of three years in a conventional lock-up period.

Between the original terms of their investments with Millennium and the firm's now-locked gates, the hedge fund has been able to hang on to billions of dollars that investors would like back.

"You can't get out since the scandal broke," said one investor, who said Millennium has returned 10% of each of his redemption requests. "We got out what we could and we continue to get out what we can. It could have been half their assets -- if not more -- if they didn't have the gate. They're extremely lucky they've got the gates, or they'd probably be finished."

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