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UPDATE 1-Activist fund Octavian says it is shutting down

* Octavian plans to return bulk of money next year

* Says it does not plan sell assets in a fire sale

* Fund was off 11 percent through August

(Adds details from letter, background)

By Svea Herbst-Bayliss

BOSTON, Oct 10 (Reuters) - Octavian Advisors, a roughly $1 billion hedge fund firm specializing in distressed investments, said it was shutting down, becoming the latest casualty of tough market conditions as it suffered double-digit losses.

The New York-based firm, run by Richard Hurowitz, told investors by letter that it will start sending money back before the end of this year and return the bulk of cash next year.

"While we have significantly outperformed the international equity markets we focus on over a multi-year period, we have not generated attractive absolute returns in an exceptionally difficult environment," Hurowitz wrote in a the letter, which was seen by Reuters. "The last eighteen months have been particularly difficult," he said. This year, alone, the fund lost 11 percent through August, a person familiar with returns but not authorized to discuss them publicly said.

The firm said it will not conduct any sort of fire sale to exit positions and asked investors to stay mum about the firm's decision to liquidate in order to "monetize the Fund's investments as smoothly and efficiently as possible."

Octavian, which has been in business for six years and generated some buzz when it began taking on management at publicly traded companies in the last year, now becomes the latest fund to shut its doors.

More funds have closed down in the first half of 2012 than during the same time a year ago, Hedge Fund Research reported, noting that 192 funds liquidated during the second quarter alone. The average hedge fund returned 5 percent through September, research firm Hennessee Group reported.

Hurowitz, like many hedge fund managers, said he has struggled with international economic crises that have often overshadowed his investment decisions.

"We are deeply frustrated by a market that is driven almost entirely by macroeconomic and political decision-making in the short and intermediate term, where idiosyncratic investments and analysis are overwhelmed by the broader backdrop, and where 'events' have become more and more difficult to effectuate and analyze," he wrote in the letter. He did not return a call seeking comment.

Octavian opened a London office last year and its top fund managers, including Hurowitz, spent many hours jetting across the Atlantic to Europe where the Greek debt crisis and fears about the euro's future loom large.

"We believe the world is currently presenting fantastic investment opportunities, but it is difficult to take advantage of them in a hedge fund structure with monthly mark-to-market benchmarking and quarterly liquidity," Hurowitz wrote.

The firm, which received seed capital from Reservoir Capital when it launched, late last year took on the boards of Canadian water heater rental and submetering company EnerCare Inc.

and German medical and electronics manufacturer Balda AG

At the end of the second quarter, Octavian listed Novagold Resources and Newmont Mining Corp. as its biggest positions, both of which are down significantly this year.

Hurowitz, who has a degree from Columbia University's law school, previously worked at Halcyon Asset Management, where Halcyon Partners Offshore fund was up 9.5 percent in the first nine months of the year.

(Reporting By Svea Herbst-Bayliss; Editing by Leslie Gevirtz and M.D. Golan)

((svea.herbst@thomsonreuters.com)(+617 856 4331))

Keywords: HEDGEFUNDS OCTAVIAN/

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