Jemmco Capital Winding Down Hedge Fund

Updated from 1:44 p.m. EDT

Jemmco Capital, a hedge fund that's been linked to the mutual fund trading investigation, is returning the money of investors in its eight-year-old flagship fund.

David Muschel, the manager of the New York hedge fund, says the process of returning money to investors in the $300 million Jemmco Partners should be completed by Sept. 30. Muschel informed investors, who include a number of institutional fund-of-funds, in a recent letter.

The fund intends to remain active until the end of the quarter.

Last week, Jemmco's name was publicly linked to the mutual fund scandal for the first time in a civil fraud complaint filed by the Securities and Exchange Commission against a group of former Prudential Securities brokers in Boston. The complaint identified Jemmco as one of seven hedge funds that the Prudential brokers had placed a total of $1.3 billion in market-timing trades for over a three-year period.

The SEC contends the brokers defrauded 52 mutual fund companies, including Fidelity Investments, Janus(JNS Quote), Alliance Capital(AC Quote), and Marsh & McClennan's(MMC Quote) Putnam Investments, by hiding behind dozens of false accounts to conceal their abusive trading. Prudential's brokerage arm is jointly owned by Prudential Financial(PRU Quote) and Wachovia(WB Quote).

Market timing is a legal trading strategy that tries to take advantage of pricing discrepancies between U.S. and foreign markets. But timing can harm long-term investors in a mutual fund because it drives up trading and administrative costs, so many mutual funds try to stop it.

The SEC contends the Prudential brokers, with the knowledge of the hedge funds, used deceitful tactics to hide their timing trades. Neither Jemmco nor any of the other hedge funds have been charged with any wrongdoing.

In an interview with TheStreet.com, Muschel says he's been contemplating giving back money to investors for nearly a year. He says the decision to wind down the flagship fund, which at one time had $600 million in assets, is not related to the mutual fund scandal.