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)

,

Alliance Capital

(AC) - Get Report

, and

Marsh & McClennan's

(MMC) - Get Report

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) - Get Report

and

Wachovia

(WB) - Get Report

.

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.

Rather, Muschel says he's giving back the money because the fund, while profitable, had under-performed for the past three years. He also wants to spend more time with his family.

"I've consulted with my investors before this to discuss this decision at length,'' says Muschel. "They were impressed by my candor in the letter and that I made a very tough decision. They will be there in the future if I want to come back.''

But things have never been the same at Jemmco ever since Muschel told investors last September that the fund had been involved in market timing. The news, which was a surprise to many of Muschel's investors, sparked a rash of redemptions. By the end of the year, sources say, investors pulled nearly $300 million out of Jemmco. Muschel said the redemptions totaled $185 million.

In a Sept. 4 letter to investors obtained by

TheStreet.com

, Muschel told investors that "between 5% and 15%" of the fund's capital had been devoted to timing activity. While Muschel told investors that Jemmco had not engaged in any "improper activities," he announced the fund would immediately stop timing mutual fund shares. The letter was written a day after New York Attorney General Eliot Spitzer formally announced his investigation into abusive mutual fund trading.

The decision to give back money to investors won't necessarily mean the end of Jemmco, although both the fund and Muschel will play a diminished role in managing money for other people. Muschel and Jemmco will still manage a small $35 million fund called Kinetic Partners, which invests mainly in energy and utility stocks. The flagship fund also may remain open to a small group of investors.

He also will be working with

RockView Partners

, a new hedge fund that Muschel is an investor in, but will not be managing on a day-to-day basis. Jemmco's remaining staff will provide support services to RockView, which is managed by Kevin Schweitzer, a Jemmco portfolio manager.

"I would like to enjoy life more, rather than managing a big behemoth organization," says Muschel.