Oct. 14 (Bloomberg) -- Hedge fund managers Paul Tudor Jones and Steven Cohen sold assets to raise cash this month as credit markets seized up and stock prices dropped.

Jones, who has been running Tudor Investment Corp.'s biggest fund for 22 years, made his move after watching the Mexican peso tumble 16 percent since the start of October, said two people with knowledge of the decisions by the Greenwich, Connecticut-based firm. Tudor manages $18 billion. Cohen, who oversees $16 billion at his SAC Capital Advisors LLC in Stamford, Connecticut, ordered traders to sell amid the worst equity rout since the 1930s, a person familiar with the firm said. The firm now holds about 50 percent of assets in cash.

The Standard & Poor's 500 Index of the biggest U.S. stocks tumbled 23 percent this month before yesterday's rally, while oil fell $23 a barrel to $77 and the Australian dollar dropped almost 20 percent against the U.S. dollar. While hedge funds sold in part to meet investor redemptions, some managers decided to get out because trading had become irrational.

``For sheer condensed intensity of craziness, the last couple of weeks beat anything I have seen,'' Barton Biggs, 75, said in a Bloomberg Television interview last week. Biggs, a former Morgan Stanley strategist, now runs New York-based hedge fund Traxis Partners LLC.

John Paulson, whose Paulson Advantage Plus Fund climbed about 25 percent this year through September, was about 70 percent in cash at the end of last month, according to investors.

`Prudent'

``I see this as prudent risk control,'' said Larry Chiarello, director of research at Red Bank, New Jersey-based Riverview Alternative Advisors LLC, which farms out money to hedge funds.

When managers do redeploy their cash, they won't expect to spark a market rally, Chiarello said. Instead, they'll look for opportunities in asset categories such as leveraged loans that are selling at distressed levels, he said. The loans are now trading at 71.1 cents on the dollar, according to Standard & Poor's LCD, a decline of 17.3 cents from Sept. 9.

Neither Jones, 54, nor Cohen, 52, have lost as much as other hedge funds, which fell an average of 9.4 percent in the first nine months of the year, according to Chicago-based Hedge Fund Research Inc. Tudor's BVI Global Fund dropped 3.7 percent through September, while Cohen's flagship fund declined about 5 percent.

Waiting to Buy

The people familiar with the firms asked not to be identified because the funds are private. Jones and Cohen declined to comment, while Paulson couldn't be reached.

While some managers may have jumped back into markets late last week or yesterday -- when the S&P 500 rose 11.6 percent, the biggest rally since 1939 -- others may still be waiting to buy.

In an Oct. 1 letter to investors, David Slager, 36, who manages the Atticus European Fund, told investors that more than 50 percent of his fund was in cash or U.S. Treasuries after he lost 43.5 percent so far this year.

``I believe it is prudent to maintain our critical focus on capital preservation and liquidity,'' he wrote. ``If we see a climactic sell-off in the market or a stabilization of credit conditions and growth prospects, then I will be inclined to raise our risk appetite once more.''

Roger Guy and Guillaume Rambourg, who run AlphaGen Capella Fund Ltd. in London, put almost 80 percent of their $2.8 billion fund in cash. The fund declined 5 percent this year as of Sept. 30.

``It's safe to assume that we are at least a few quarters away from the stabilization we seek,'' they wrote in a report on September returns to investors. Until then, ``the best strategy is to adopt a bunker strategy.''

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

Last Updated: October 14, 2008 12:49 EDT