A once-flourishing Hong Kong hedge fund has been shut down by regulators and up to $56 million in investor money is missing after the arrest of its manager, officials said Wednesday.

The fund probably will be liquidated once the chaos is sorted out, according to a letter sent to investors.

CSA Absolute Return, a fund of hedge funds run by Hong Kong-based Charles Schmitt & Associates and managed by founder Charles Schmitt, was frozen Wednesday by the Hong Kong Securities and Futures Commission. The commission acted on a tip provided by the management firm's chief financial officer and managing director.

CFO Jennifer Carver initially told investors of the blowup Tuesday, writing that she and MacDougall "came across some internal documents that led us to suspect irregularities in the CSA Absolute Return Fund, managed by Charles Schmitt."

In a second letter Wednesday, Carver said Schmitt is in police custody and that regulators had frozen all accounts connected to him and the fund while the debacle is investigated. Of $197 million invested in the fund, $141 million had been located, Carver wrote.

"Most likely, once we find all the assets, the fund will be liquidated and assets will be returned to individual investors, so there is no real point to sending us redemption requests at this time," Carver wrote.

"We still have to confirm completely that this money belongs to the fund, but we are fairly confident that this is the case," she wrote. "We are still looking through the accounts that have been frozen and are hopeful that we will find more."

The securities commission said Schmitt's explanations for what happened to the money have been unconvincing.

"Based on the intelligence received and further information gathered by an SFC team, the SFC met Mr. Schmitt yesterday, who was not able to provide satisfactory answers regarding transfers of client monies into bank accounts with which he is connected," the commission said Tuesday. "Based on information so far, the SFC believes that the case might be an isolated case of misappropriation and concerned the conduct of an individual."

Such a blowup is a relatively rare occurrence in the tiny world of Asian hedge funds. Only about 360 of the estimated 8,600 hedge funds worldwide are based in Asia, and the region saw only 86 new funds launched in 2003, according to Eureka Hedge, a financial publisher.

The CSA Absolute Return Fund was launched in Hong Kong in 1997 and invests in about 10 individual U.S. hedge funds. Charles Schmitt & Associates also runs a fund of hedge funds listed on the Dublin Stock Exchange and a similar fund of funds domiciled in the British Virgin Islands. The $22.7 million Dublin fund opened to investors in February. The BVI fund had about $58.7 million under management, according to the firm's Web site.

Carver told investors that there are no apparent problems with the other funds.

"There is nothing I can possibly say to express how sorry we are," she wrote.

George Van, founder of Van Hedge Fund Advisors International of Nashville, Tenn., said his firm established a marketing and development agreement last March with Charles Schmitt & Associates for the British Virgin Islands fund. Van said he was surprised to receive Carver's letter.

"The bad news is that there appears to be something going on with that fund," he said. "The good news is that we've been told the others are all right, and that we don't have anything to do with the CSA Absolute Return fund."

According to the firm's Web site, the fund is up 2.78% in 2004, and had a 14.45% return last year. It has had positive returns since its inception in 1997, with the best results coming in 1999, when it returned 23.7%. Its worst year was 2002, when it returned an even 9%.

A 0.51% loss for March and a 0.16% loss in April were the only two consecutive losing months in the history of the fund.

A biography on the Web site claims Schmitt was once a senior business manager for the New York Stock Exchange, and helped manage the NYSE Pension Fund. He also managed funds for Citibank, Chase Manhattan Bank, Lehman Brothers and the John Hancock Life Insurance Co.

An NYSE spokesman initially professed no knowledge of Schmitt's employment at the exchange, but later said Schmitt worked there from August 1977 to October 1980.

CSA Absolute Return requires a minimum investment of $250,000 for its A-class shares, and $100,000 for its B-class shares.

Although most individual U.S. investors are barred from investing directly in offshore hedge funds, the Charles Schmitt funds could have American money through family offshore trusts, or investments from tax-free institutions, such as charitable foundations or educational endowments. Many U.S. colleges and universities invest in hedge funds.