For the Clinton Group, the hedge fund manager under investigation for the way it prices its asset-backed securities portfolio, the headlines aren't improving.

On Thursday, the beleaguered hedge fund manager learned that ratings agency Standard & Poor's was reviewing its spot on the S&P Hedge Fund Index, which tracks the performance of a group of 40 major hedge funds. Since August, Clinton has lost $1.5 billion to investor redemptions, is hosting a pair of federal investigations on its asset-backed securities pricing and saw the departure of key executives bring unwelcome public scrutiny, all while some of its funds continue to lose money.

S&P said one Clinton fund would be removed from its fixed-income arbitrage strategy index because it is closing. The firm decided to close its Clinton Arbitrage Portfolio last month. The fund had $185 million when it was closed; some money was returned to investors, some was rolled over into other Clinton funds.

After a flat performance at the end of August, investors started asking for their money back, when Clinton announced it would change its redemption policy from monthly to quarterly and require 45 days' notice. The fund dropped 3.78% in September and is down 3.79% for the year to date, according to a person familiar with the fund.

The firm this week extended its quarterly redemption interval to Dec. 1, in hopes that an independent investigation by PricewaterhouseCoopers will soothe remaining investors and that investigations by the

Securities and Exchange Commission

and the Commodities Futures Trading Commission will conclude without additional trauma.

The rating agency, a division of

McGraw-Hill

(MHP)

, said its decision "is based on recent events" and that "Clinton Group Inc.'s convertible strategy remains in the index and is under ongoing review."

David Blitzer, chairman of the index committee at S&P, said the company would continue to follow developments at Clinton "to improve our understanding and decide whether our concerns are sufficient that we would remove the second fund."

The public announcement was somewhat unusual; most of the major indexes tracking the largely unregulated hedge fund industry do not publicly disclose the names of the funds they track, though Standard & Poor's does

furnish a list on its Web site.

A spokesman for S&P said one other fund has been removed from the index since it was launched last October. A fund run by Jemmco was unable to maintain the rating agency's separate managed account, which is required for participation in the index.

Clinton's fund was replaced by an arbitrage fund run by West Side Advisors, a $550 million New York hedge fund run by Gary Leiberman.

Clinton's account for the recently closed fund was less than $10 million, according to a person familiar with the situation.

All this follows last month's very public announcement that former senior trader Anthony Barkan left the firm because of problems with the pricing of its asset-backed securities. That prompted top management to call in PricewaterhouseCoopers to check its portfolio valuations -- the report is eagerly anticipated.

At the time, Clinton issued a statement that it took comments of this nature seriously and brought in the independent auditor. PricewaterhouseCoopers also did portfolio valuation work after of huge losses last year at Beacon Hill Asset Management, another hedge fund that had serious problems with its hard-to-value mortgage- and asset-backed securities.

"It's probably the most interesting show on Wall Street right now," one industry expert said. "Everybody's waiting for the curtain to rise and to see what's behind it. The bets were that there's too much smoke to believe there's no fire."

Clinton has seen its hedge fund assets dwindle to $4 billion since the end of August, when it was managing $5.5 billion in hedge funds. It has another $5 billion in collateralized debt obligations and separately managed accounts.

Its flagship Trinity Fund, which has about $935 million, is down 7.13% for the year to date and has seen heavy redemptions, with a 4.79% drawdown in August. Its Global Fixed Income Fund is down 3.19% for the year to date. Its $1.9 billion multistrategy fund is up 1.78%, though it has seen an estimated $200 million in investor redemptions since August.