Sept. 10 (Bloomberg) -- RAB Capital Plc is trying to freeze client redemptions for three years to avoid liquidating its flagship hedge fund, which lost almost half its value this year after writing down an investment in a motor-racing franchise.

Special Situations, RAB's largest fund, lost 22 percent in August, bringing this year's decline to 48 percent. Most of the loss came from its private-equity stake in A1GP, a rival to Formula One, London-based RAB said in a letter to investors today.

RAB Chief Executive Officer Philip Richards stepped down this month to concentrate on the fund, which returned 1,475 percent in 2003. Richards, who initially had four-fifths of the fund invested in natural resource companies, widened its focus to include the racing company and 35 million shares of Northern Rock Plc, the U.K. mortgage lender nationalized by the government.

``In a worst-case scenario, unwinding of this could pose a significant threat to the franchise, said Irfan Younus, an analyst at NCB Stockbrokers in London who rates the stock ``reduce.''

RAB rose 0.8 percent to 29.5 pence in London, valuing it at 147 million pounds. The stock is down 66 percent this year.

RAB said investors have until Sept. 29 to vote on the plan, which would cut fees and postpone redemptions until Oct. 3, 2011. It will liquidate the investments if it's unable to get investor support for the new structure, the company said.

At least 75 percent of investors voting in the fund's Cayman Island-listed vehicle would need to approve the plan, according to Stephen Couttie, who took over as CEO this month.

`In It Together'

``Investors have indicated this lockup will be fine as long as everyone's in it together,'' Couttie said in an interview today.

The family of Lakshmi Mittal, one of Britain's wealthiest men and head of the world's largest steel company, is one of the company's biggest investors, with a 10.4 percent stake. The family invested $200 million in Special Situations in December 2006 with an agreement to keep the investment for at least three years.

RAB told investors it was the third time it had written down the value of the racing franchise, which was supposed to create a ``World Cup of Motorsport'' with national teams racing identical cars, according to its Web site.

The fund paid $200 million in December to purchase an 80 percent stake in the A1GP racing series from Sheikh Maktoum Hasher Maktoum Al-Maktoum of Dubai's royal family. It has yet to gain popularity with motor racing enthusiasts, and RAB delayed plans for an April 2007 initial public offering.

RAB also was hurt by its investments in natural resource companies, which have been hammered by a collapse in commodity prices. Ospraie Management LLC, the New York investment firm run by Dwight Anderson, said last week it was closing its biggest fund after it slumped 39 percent on bad bets on commodities stocks.

Cutting Fees

Special Situation's assets under management fell to $923 million as of Sept. 1 from $1.4 billion on June 30 and $2 billion in December 2007 and as much as $2.3 billion on June 30 2007.

Under RAB's existing arrangement, withdrawals are paid out quarterly and investors can ask for their money back by giving 180 days' notice. The fund manager is proposing cutting management fees to 1 percent from 2 percent, and annual performance fees would fall to 15 percent from 20 percent, RAB said.

``We're trying to tell investors we don't want to liquidate in these markets and their best interest is committing to a longer duration,'' Couttie said. ``Our proposal is anchored in the belief that we can win this vote, but in the event we don't, we still want a fair solution for investors.''

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.netTom Cahill in London at tcahill@bloomberg.net

Last Updated: September 10, 2008 13:19 EDT