Hedge Fund Woes: Troubles at Citadel, Highland

Ongoing hedge fund losses and liquidations spooked markets Wednesday, and some of the biggest names in the mix now are Citadel Investments and Highland.

Hedge funds had their worst month ever in September, with average losses of 6.2 percent, according to an estimate by TrimTabs Investment Research.

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All major categories of funds chalked up losses over the month, but emerging markets, long equity funds and distressed strategies had the worst results. The declines came as investors withdrew $43 billion from hedge funds—almost seven times the previous monthly record for redemptions, TrimTabs said.

Citadel confirmed to CNBC that its flagship Kensington and Wellington funds, which hold around $15 billion in assets, are down between 26 percent and 30 percent so far this year.

But Chicago-based Citadel denied rumors that it's having difficulty meeting margin calls and is facing mass redemptions. The firm also denied that it's unwinding any positions.

Highland, on the other hand, is unwinding positions, according to traders with knowledge of the activity of the big hedge fund company, which has $14 billion under management.

According to one trader with firsthand knowledge of Highland's activities, Highland is selling big blocks of assets; today, Highland settled on 30 cents on the dollar for $20 million to $30 million in bank loans that the firm only last week was trying to unload for 60 cents on the dollar.

More tellingly, the trader said, Highland has put out a bid list for $600 million of loans. It's important to note that it isn't clear whether the bid list represents the beginning of a massive unwinding of positions, or just some major selling in order to meet redemptions.

- CNBC'sDavid Russell contributed to this report.