As SAC questions loom, investors head for the door

Steven A. Cohen
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Steven A. Cohen

Three weeks after being indicted on insider trading charges, SAC Capital is prepared for another round of investor redemptions that could drain nearly all its outside assets by year's end.

The fund-of-funds unit of Blackstone Group, whose $550 million in invested capital at the beginning of this year made it SAC's largest outside backer, asked to redeem all its money last quarter, according to two people familiar with the matter.

A $616 million settlement with the Securities and Exchange Commission had not convinced Blackstone that SAC's legal woes were behind it, one of these people added.

Other erstwhile investors, like Morgan Stanley and Ironwood Capital, also pulled some or all their funds from the firm, say other people familiar with those companies' decisions.

(Read more: If your hedge fund is criminal, it'd better be big)

SAC's outside investor capital has been depleted this year as investors have grown leerier of the firm's legal headaches.

Whereas SAC started the year with $16 billion in assets—about $10 billion of which belonged to founder Steven Cohen and other insiders—by the end of the year it will be down to a little more than $1 billion in outside money, according to a person familiar with the numbers. (There is a lag time between redemption requests and the exodus of funds because SAC investor money is returned in partial payments over a period of multiple quarters.)

On Friday, SAC's investor-relations officials will likely field a fresh round of redemption requests from their remaining outside investors, who have until the end of the day to notify the firm of any plans to pull money starting on Sept. 30. A spokesman for the firm said SAC would not be commenting on the nature or size of the quarter's redemptions.

(Read more: SAC-linked fund closes as shrinkage sets in)

For the first several years of the government's probe into its trading activities, investors impressed with SAC's performance stayed largely loyal to the firm, which was known for a rapid-fire trading style that made it a substantial player in each day's equity markets.

Indeed, after notching standout returns in recent years, SAC's flagship fund has risen 10 percent this year through July, notching slow and steady upticks even during more volatile spells.

But the indictment of two key SAC figures over the course of the last year and the specter of an ongoing probe of Cohen and other employees ultimately proved too nerve-wracking for many outside investors, who were concerned that criminal charges against the firm or its founder might bring the business down.

As it turned out, investors had ample reason to be anxious.

(Read more: SAC to keep managing money while facing indictment)

In mid-July, two months after SAC's second-quarter redemption deadline, the Securities and Exchange Commission filed civil charges against Cohen, arguing that he failed to supervise scofflaws on his staff despite warnings.

A week later, U.S. Attorney Preet Bharara obtained an indictment of SAC on multiple counts of securities and wire fraud.

SAC has pleaded not guilty to the criminal charges, and Cohen's SEC suit—which seeks to bar him from the securities industry, among other things—has been delayed until the criminal matter is resolved.

Late last week, SAC reached an agreement with the U.S. Attorney's Office enabling it to continue trading normally until the case is resolved.

—By CNBC's Kate Kelly. Follow her @KateKellyCNBC on Twitter.