The beleaguered hedge fund unit of the Clinton Group lost three top executives in a reshuffle as investors continued to pull money out of its remaining funds specializing in mortgage- and asset-backed securities.

The 13-year-old hedge fund also told investors it is widening its emphasis to include merger arbitrage and distressed investing. It named statistical arbitrage portfolio head Richard Cohen as its new chief investment officer and convertible arbitrage chief Michael Vacca as chief operating officer. Both have worked at Clinton for six years.

A letter to investors, dated April 16, the company announced that Rishin Roy, Thomas Schnepp and Seth Fischoff had left the firm. A former investor said he believed it was due to dwindling assets in the firm's once formidable hedge fund business.

Clinton had about $5.5 billion in its six hedge funds last August, and now has about $1.4 billion in five funds. Its flagship Trinity Fund closed after it suffered a 21.5% loss in 2003. It still runs about $4.5 billion in relatively illiquid collateralized debt-obligation pools, which prevent investors from withdrawing their money.

A person familiar with the firm said the Clinton Multistrategy Fund, which had about $1 billion at the end of 2003, was up 4% for the year to date.

Problems with Clinton's hedge funds surfaced last October when senior trader Anthony Barkan resigned in a very public fashion, issuing a statement that he was concerned about the valuation methods used in pricing some of the bonds in the firm's portfolios. His announcement triggered investigations by the Securities and Exchange Commissionand the Commodities and Futures Trading Commission, and prompted Clinton to hire PricewaterhouseCoopers to examine pricing methods for all of its securities. The federal agencies have yet to announce any findings.

In November, Clinton Group founder George Hall wrote to shareholders and said the PwC investigation showed no significant problems, but the reassurance did little.

"We didn't feel there was some kind of a disaster," said one investor, whose firm pulled most of its $10 million investment late last year. "But there's a 'no smoke without fire' sentiment, and that's not terribly comforting."

A representatives for the Clinton Group said the firm had no comment on the letter.

The firm's recent letter to investors outlined the widespread extent of the management changes: Roy, a five-year veteran who headed the risk management group, was replaced by Alan Malz and Amy Lai; Bob Wenzel, John Zhao and Robert Smalley took over global bond arbitrage from Schnepp; and Greg Drennen continues as top trader for mortgage- and asset-backed securities. Fischoff, who rejoined Clinton only in November after resigning in August, was assisting Drennan.

"There was a general bad atmosphere in the office," said the former investor. "There were departures of key staff the whole time. People had been used to having big bonuses and a big pool of money to share around."

In the letter, Patrick O'Meara, the firm's director of marketing, said Vacca will continue to lead a five-person event-driven trading team, three members of which are replacements for recently departed staff. The event trading fund is still small, said a person familiar with the firm.

Eric Scroggins, of distressed debt specialist hedge fund Chanin Capital Partners; William Harrison, a mortgage and acquisitions specialist with Credit Suisse First Boston; and corporate restructuring specialist Marc Schiffman recently joined the firm.

"We believe that their experience and backgrounds will greatly enhance our ability to grow and diversify this business in the future, particularly in the areas of merger arbitrage and distressed investing," O'Meara said.