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 $1billion hedge fund firm specializing in distressed investments,said it was shutting down, becoming the latest casualty of toughmarket conditions as it suffered double-digit losses.

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

"While we have significantly outperformed the internationalequity markets we focus on over a multi-year period, we have notgenerated attractive absolute returns in an exceptionallydifficult environment," Hurowitz wrote in a the letter, whichwas seen by Reuters. "The last eighteen months have beenparticularly difficult," he said. This year, alone, the fundlost 11 percent through August, a person familiar with returnsbut not authorized to discuss them publicly said.

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

Octavian, which has been in business for six years andgenerated some buzz when it began taking on management atpublicly traded companies in the last year, now becomes thelatest fund to shut its doors.

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

Hurowitz, like many hedge fund managers, said he hasstruggled with international economic crises that have oftenovershadowed his investment decisions.

"We are deeply frustrated by a market that is driven almostentirely by macroeconomic and political decision-making in theshort and intermediate term, where idiosyncratic investments andanalysis are overwhelmed by the broader backdrop, and where'events' have become more and more difficult to effectuate andanalyze," he wrote in the letter. He did not return a callseeking comment.

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

"We believe the world is currently presenting fantasticinvestment opportunities, but it is difficult to take advantageof them in a hedge fund structure with monthly mark-to-marketbenchmarking and quarterly liquidity," Hurowitz wrote.

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

and German medical and electronics manufacturer BaldaAG

At the end of the second quarter, Octavian listed NovagoldResources and Newmont Mining Corp. as itsbiggest positions, both of which are down significantly thisyear.

Hurowitz, who has a degree from Columbia University's lawschool, previously worked at Halcyon Asset Management, whereHalcyon Partners Offshore fund was up 9.5 percent in the firstnine months of the year.

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

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