Nov. 20 (Bloomberg) -- Copper Arch Capital LLC, the hedge- fund firm run by former Morgan Stanley managing director Scott Sipprelle, is liquidating and returning money to clients after returns trailed peers this year.

Sipprelle, 44, who started managing money independently in 1998 after leaving Morgan Stanley, will give refunds starting Dec. 31, according to a Nov. 5 client letter obtained by Bloomberg. The New York-based firm, which bets on both rising and falling stock prices, gained about 1 percent through Oct. 31, compared with the 12 percent industry average tracked by Hedge Fund Research Inc. in Chicago.

Copper Arch, which managed $966 million as of March, gained about 16 percent in 2006, beating the industry's 13 percent average increase. Sipprelle said in the letter that it's ``the right time'' to look for ``new challenges.''

``If the guy who's the primary portfolio manager isn't motivated, his giving money back is good for investors,'' said Brett Barth, a partner at New York-based BBR Partners, which farms out money to hedge funds. He's not a Copper Arch client.

Sipprelle's decision to close was reported yesterday by hedge-fund news site Opalesque.com.

Before opening Copper Arch in 2003, Sipprelle and fellow ex-Morgan Stanley colleague Neil Barsky ran Midtown Research Group, which started in 1998 selling research to investors in initial public offerings and then managed hedge funds. The two split in 2002.

`Out of Step'

Starting in December 2004, Sipprelle and Copper Arch pushed Morgan Stanley to sell assets in order to boost the New York- based firm's stock price under then-Chief Executive Officer Philip Purcell.

Copper Arch's returns overall have been ``very good'' during ``a variety of challenging investing climates,'' Sipprelle said in the client letter. At other times, including this year during what he called the ``Petro-Google market,'' the firm has ``looked hopelessly out of step.''

Sipprelle declined to comment today by e-mail.

``I have many ideas, but no definitive plans,'' Sipprelle told clients. He likened a hedge fund to a Puccini opera, ``soaring, majestic and ultimately `over'.''

Investors gave a record $164 billion in new cash to hedge funds in the first nine months of 2007, topping the $126 billion raised during all of last year, according to Hedge Fund Research. New funds are starting at the slowest pace since 2003 as investors gravitate to firms with proven records, according to the research firm.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Globally, managers oversee more than $1.8 trillion.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net.

Last Updated: November 20, 2007 17:40 EST