A group of investors in the Beacon Hill Asset Management hedge fund, currently the subject of both criminal and regulatory investigations, is suing an investment-management firm that owns a controlling stake in the fund for alleged fraud. The lawsuit, filed Tuesday in a Manhattan federal court, claims that Asset Alliance, a $4.5 billion hedge fund incubator and investment-management company, knew or should have know that Beacon Hill's managers "artificially inflated" the funds' returns last summer. Beacon is among a long list of big hedge funds that have fallen on hard times in the past year. Others include Lancer Partners, the Lipper Convertible Bond Funds and Gotham Partners. And like Beacon, there have been allegations that each of these hedge funds overvalued the assets in their portfolios. Asset Alliance, which provides seed money to about a dozen hedge funds, owns a 50% equity stake in Beacon Hill. A spokesman for Asset Alliance, which is managed by former Wall Street investment banker Bruce Lipnick, couldn't be reached for comment. The Securities and Exchange Commission moved to shut down Beacon Hill last fall, after claiming the hedge fund misled investors about how it lost an estimated $400 million in the mortgage-backed securities market. At one time, Beacon Hill, based in Summit, N.J., was one of the biggest hedge funds in the mortgage-backed securities market. At its height, the six-year-old hedge fund managed about $2 billion in assets and even counted a Morgan Stanley ( MWD) investment partnership as an investor. The 32 investors who filed the lawsuit collectively sank more than $79 million into Beacon Hill. In addition to Asset Alliance, they also are suing the hedge fund and its four-member management team. The investors include several offshore investment funds, along with a number of individual investors from the United Arab Emirates. The filing of the investor lawsuit comes roughly two months after federal prosecutors in New Jersey initiated a grand jury investigation into the problems at Beacon Hill. The New Jersey U.S. Attorney's Office is looking into allegations of securities fraud and other misconduct at Beacon Hill.