Dec. 5 (Bloomberg) -- Citadel Investment Group LLC is opening a $2 billion hedge fund to new cash from clients and plans to have it buy stocks from the firm’s two biggest funds, which have lost almost half their value this year.

The firm, run by Kenneth Griffin, hopes to raise as much as $500 million before the end of the year, according to a letter sent to investors. Clients will be allowed to put money in the Citadel Tactical Trading fund, whose returns exceeded 40 percent this year through November.

Citadel also told investors that the Tactical fund, whose returns are tied to the firm’s market-making business, will buy about half the stocks held by its Kensington and Wellington funds at market prices. Those funds, with $10 billion in assets, have fallen about 47 percent this year, the Chicago-based company’s worst since being founded in 1990.

“Citadel Kensington and Citadel Wellington will experience reduction in the risk associated with their portfolios and enhanced liquidity from the transfer of a substantial portion of the Global Equities portfolio,” the firm said in the letter, a copy of which was obtained by Bloomberg News. The sale will take place at the end of the year.

Griffin, 40, has posted just one losing year since starting the firm, dropping 4 percent in 1994.

“We continue to evolve the business to expand where we see opportunities and to scale back where the opportunity set is no longer as attractive,” Chief Operating Officer Gerald Beeson said in an interview today.

Citadel’s stock-picking team, with about 80 employees, has made money this year and will manage the equity positions of the Tactical Trading fund, the letter said.

Citadel told investors that returns of the Tactical Trading funds may decline as market volatility and trading volumes fall. Taking on the stock holdings “should create a second source of revenue,” the letter said.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: December 5, 2008 16:29 EST