UPDATE 1-Citadel to allow redemptions on flagship funds

By Joseph A. Giannone NEW YORK, Oct 29 (Reuters) - Citadel Investment Group, which last year banned redemptions from its hard-hit flagship hedge funds, is lifting those restrictions next month as fund performance rebounds, according to a letter to investors. In a separate development, Rohit D'Souza, a former Merrill Lynch executive tapped last year to build an investment banking business at Citadel, left the firm Thursday. A spokeswoman confirmed the departure but declined to say why D'Souza was departing after less than a year or if he was fired. As financial markets crumbled last year, Citadel's flagship Wellington and Kensington funds plunged 55 percent -- a bigger drop than the average hedge fund and worse than the broader stock market. Cash-strapped investors responded with a wave of redemption requests. Yet a 57 percent surge in performance this year, back to about $14 billion, has prompted the Chicago firm to remove the bans and let clients withdraw their money as of Nov. 30, according to the letter, a copy of which was obtained by Reuters. Hedge funds on average were up 17 percent through September, according to Hedge Fund Research. Reuters first reported in September that Citadel was preparing to unlock the funds' gates. Wellington is the onshore version, and Kensington an offshore version of the same fund. In series of questions and answers accompanying his monthly letter, Citadel Chief Executive Kenneth Griffin also disclosed that Citadel had responded to last year's losses by shedding hard-to trade assets and boosting the liquidity of its portfolio. Griffin also said its out-sized investment in online broker E*Trade Financial Corp, while "quite profitable" was a highly concentrated bet he is not likely to ever repeat. (Reporting by Joseph A. Giannone; Editing by Tim Dobbyn) Keywords: CITADEL/GATES ([e-mail]; [phone]; Reuters Messaging: [e-mail] ) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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