Dec. 23 (Bloomberg) -- Cerberus Capital Management LLC, the $27 billion investment firm founded by billionaire Stephen Feinberg, limited investor withdrawals from one of its hedge funds after it lost 16 percent this year through November.

The restrictions, known as gates, were triggered after clients sought to pull more than 16.5 percent of their money from Cerberus Partners LP by the end of the year, according to a Dec. 19 letter sent to clients. Cerberus said investors could get 20 percent of their year-end redemption requests, while the limits on the rest will last as long as a year.

“This is a very hard decision for us, and the realization that taking these steps is now necessary is deeply disappointing,” the firm said in the letter, which was signed by Feinberg and William Richter, a senior managing director.

Hedge funds including Magnetar Capital LLC, D.E. Shaw & Co. LP and Farallon Capital Management LLC have already imposed gates so they wouldn’t be forced to raise cash by liquidating assets at distressed prices. Hedge funds are finishing their worst year on record amid slumping stock and commodity markets and a freeze on credit.

The Cerberus fund lost 12.18 percent in October and November, the firm said. Jim Olecki, a spokesman for Cerberus, declined to comment. CNBC reported the redemption move earlier today.

The firm said it will waive 60 percent of the incentive fee, or its cut of investment profits, for 12 months after recouping losses. The waiver is for money that remains in the fund as of Dec. 31, Cerberus said.

Chrysler, GMAC

Cerberus, founded by former Drexel Burnham Lambert Inc. banker Feinberg in 1992, is coping with a $15 billion bet on the U.S. auto industry that’s gone awry.

The letter was sent to investors the same day Cerberus said it would hand over its stake in Chrysler LLC’s automotive business to employees and creditors as part of an agreement with the U.S. government for a loan to prop up the ailing carmaker.

The private-equity firm also owns a controlling interest in GMAC LLC, the financing arm of General Motors Corp. GMAC is trying to convert to a bank so it can receive money from the U.S. Treasury department’s $700 billion rescue fund.

“It’s momentous,” said Paul Schaye, managing director of New York-based Chestnut Hill Partners, which helps buyout firms find deals. “This continues the bailout of every type of financial institution. Everyone’s getting in line, including private equity.”

In the investor letter, Feinberg defended the car deals.

“We still believe we bought well,” he said of Chrysler and GMAC. “In those cases, we got caught in what we see as a ‘perfect storm’ in the auto and housing sectors.”

Unrelated to Madoff

Cerberus said none of its fund’s assets are directly or indirectly invested with Bernard Madoff, who was arrested Dec. 11 after allegedly confessing to employees that he had run a “giant Ponzi scheme” that may have cost his clients as much as $50 billion.

Aozora Bank Ltd., the Japanese lender majority-owned by Cerberus, said it has 12.4 billion yen ($136 million) at risk related to Madoff’s funds. Ezra Merkin, whose Gabriel Capital LP invested $1.5 billion with Madoff, is chairman of GMAC LLC, the finance arm of General Motors Corp. that is 51 percent owned by Cerberus.

Industry assets peaked at $1.9 trillion in June, according to Hedge Fund Research Inc. in Chicago. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.

As of October, 18 percent of the hedge-fund industry’s assets, or about $300 billion, were subject to withdrawal restrictions, according to GFIA Pte, a Singapore-based hedge-fund consulting firm.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: December 23, 2008 17:44 EST