Oct. 2 (Bloomberg) -- Wachovia Corp. curbed access to a $9.3 billion investment fund used by more than 900 colleges to pay salaries, maintenance and other expenses and said it plans to sell the portfolio by the end of the year.

Colleges can redeem only 34 percent of their investments in the short-term Commonfund because of the ``liquidity squeeze,'' said Laura Fay, a spokeswoman for Charlotte, North Carolina- based Wachovia, in an interview. Earlier this week Wachovia, the trustee for the fund, had capped availability at 10 percent.

Wachovia's move sent colleges rushing to tap other accounts and worrying that they won't have enough cash to pay bills. Bethany College in Lindsborg, Kansas, had about $700,000 in the fund when access was restricted, had been planning to take out $400,000 in November, and now is assessing alternatives, said Edward Leonard, president of the school.

``It was really a sucker punch, you didn't know it was happening,'' Leonard said in a telephone interview today. The short-term fund isn't the only source of cash, he said, noting that the school has an endowment valued at $25 million at June 30. ``The one thing I don't want the college to do is to panic,'' he said.

Elon University in North Carolina, with $46 million in the short-term fund as of three days ago, also said Wachovia was forcing it to dip into other funds.

``We are going to use the liquidity we have elsewhere to supplement what redemptions we were able to get to pay the bills we need to pay for,'' said Gerald Whittington, vice president for business, finance and technology at Elon, in a telephone interview today. ``It's not going to slow us down, but it makes us have to do things we otherwise wouldn't have had to do.''

`Unprecedented Environment'

The ``unprecedented environment'' in the market contributed to Wachovia's decision to curtail the fund and plan its closure by Dec. 31, Fay said. The vote Sept. 29 by the U.S. House of Representatives rejecting a $700 billion financial-rescue package influenced the decision, she said. Wachovia agreed Sept. 29 to sell its banking operations to Citigroup Inc.

Whether the fund can provide all of the money to the colleges ``depends if some of the pressure eases in the market place,'' Fay said. ``Our intent is to unwind the portfolio in as prudent a way as possible and provide as much liquidity as we can.''

Wachovia's move took the Commonfund by surprise, said John Griswold, executive director of the Commonfund Institute, the research arm of the Wilton, Connecticut-based investment adviser.

No Losses

``Wachovia was the trustee of the fund and they resigned and closed it,'' Griswold said in a telephone interview. ``Everybody was upset to hear this news, especially at the end of a quarter, when they have to make payroll and cover expenses, and it was uncertain how quickly they could get access.''

In a statement on its Web site, Commonfund said ``Wachovia's actions were not taken in response to any losses in the fund and were not a response to an increase in redemptions.''

On the Web site, Commonfund said it is seeking a new trustee for the fund, and that to date no participants have incurred any losses to their invested principal.

Even if the fund isn't able to sell any assets, as may not be the case if the markets unfreeze, ``liquidity will rise to 57 percent by year-end based solely on maturing securities in the fund,'' Commonfund's president, Verne Sedlacek, said in a memorandum posted on the Web site.

1974 Creation

The short-term fund, created in 1974, is structured to provide at least the average yield on a three-month U.S. Treasury bill, Commonfund said in a statement. Colleges and universities use the fund like a money-market account, gaining quick access to their investments, said David Clay, treasurer of Grinnell College in Grinnell, Iowa, yesterday in a telephone interview.

Fay said Wachovia had been discussing the situation with Commonfund. ``We have had conversations with the Commonfund months in advance to consider alternatives,'' she said, adding that Wachovia wanted an ``orderly and fair distribution of assets.''

Grinnell had about $4.8 million in the fund before it closed, said Russell Osgood, president of the school. Grinnell's operations aren't affected by the closing because the college had already started withdrawing money and diversifying its cash deposits about six months earlier, he said.

``We had no suspicions or thoughts,'' Osgood said in a telephone interview. ``We just thought that this looked like a situation of higher redemption out of the fund.''

$1.5 Billion Endowment

Grinnell used Commonfund as a place to store cash that exceeded the insured deposit limits at banks and that could also still be accessed readily, Osgood said. Grinnell, with an endowment of $1.5 billion at June 30, had a small part of the school's total assets in the short-term fund.

Joseph Nelson, vice president for finance at Kenyon College in Gambier, Ohio, said the school has about $3 million in the short-term fund.

``We expect to be fully whole on the transaction and we're just dealing with the situation as it develops,'' he said. ``We have no reason to believe there will be any material impact. Kenyon is very liquid.''

The Commonfund was viewed as ``a safe place to put your short-term dough,'' Jonathan Brown, president of the Association of Independent California Colleges and Universities in Sacramento, California, said in a telephone interview yesterday. Small and mid-sized colleges with smaller endowments use the fund ``as a depositary. They are the ones who want to use this as cash flow.''

To contact the reporters on this story: David Olmos in San Francisco at dolmos@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net;

Last Updated: October 2, 2008 13:17 EDT