Citadel to cover operating expenses

Citadel declined to specify how much of the costs it would absorb, but estimates range from $200 million to $300 million. When management fees were high relative to returns in 2005, Citadel founder Ken Griffin reimbursed investors. The hedge fund will again start charging its standard fees in January.

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Citadel's two largest funds have suffered losses of almost 50 percent through November. Assets under management total around $13 billion and clients have requested about $1 billion worth of redemptions. Hedge funds typically finance operations by taking 2 percent of assets, then retaining 20 percent of profits to pay employee performance bonuses. Citadel bills investors for expenses, which can represent as much as 8 percent of assets, and keeps 20 percent of profits. Among expenses charged to investors are annual bonuses to Citadel employees, according to people familiar with the hedge fund.

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A key challenge is that Kensington and Wellington have to make back their losses before Citadel can collect its 20 percent share of profits. Citadel has not announced any plans to liquidate the funds.

"I have yet to see a fund go down by 30 percent and live," said University of Illinois at Chicago finance professor Dale Rosenthal. "The whole thing sort of cascades. Investors increasingly want out. Employees leave."