June 18 (Bloomberg) -- Lehman Brothers Holdings Inc. invested in former trader Rick Rieder's new hedge fund and sold it about $5 billion of assets, positioning the investment bank to profit from the stakes while shrinking its own balance sheet.

Lehman, the fourth-biggest U.S. securities firm, is a minority investor in the fund, called R3 Capital Partners, Rieder said. He declined to say how much money he raised from his former employer or outside investors. Lehman spokeswoman Kerrie Cohen declined to comment.

``These are assets we feel very comfortable with,'' Rieder, 46, said in an interview today. ``They have terrific potential for great returns. Just like other shareholders, Lehman will benefit from the returns we'll make going forward.''

The 21-year Lehman veteran most recently ran the global principal strategies group, investing in credit arbitrage, aviation finance and private equity, and left the firm last month to start R3 in New York. Lehman, which reported a $2.8 billion second-quarter loss earlier this week, sold $147 billion of assets in the three months ended May 30 as it hunkered down to weather the credit crisis.

Rieder said 75 percent of the assets his fund bought from Lehman were corporate bonds and loans. There were also some distressed debt and aviation stakes in the mix, two other areas he focused on while at Lehman. The fund will continue to acquire similar holdings in the marketplace, Rieder said.

Lehman Chief Executive Officer Richard Fuld decided to unload assets and raise capital from outside investors to reduce reliance on debt after the firm's shares fell more than 60 percent on speculation the company faced mounting mortgage- related losses.

Level 3 Assets

Among the assets sold during the past quarter were $26 billion of mortgage bonds and leveraged loans, which have plummeted in value during a credit-market contraction that has saddled banks and brokerages worldwide with about $396 billion of losses.

R3 bought about $100 million of Lehman's so-called Level 3 assets, which are the hardest to value because market prices are scarce, according to people familiar with the matter. Many of the firm's mortgage-related holdings are categorized as Level 3, along with other distressed debt.

Lehman sold $3.5 billion of Level 3 assets during the quarter, the firm's finance chief, Ian Lowitt, told analysts in a June 16 conference call.

David Sherr, another former Lehman executive who set up his own hedge fund, bought less than $5 million of assets from Lehman, according to people with knowledge of the transaction. His New York-based fund, One William Street Capital Management, has about $500 million under management.

Sherr, who headed Lehman's securitization division until he left the firm in December, didn't reply to a phone call seeking comment.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: June 18, 2008 18:02 EDT