Russell Investments, known for its Russell 2000 index of small stocks, has earned a reputation for financial savvy and smart money management. Then it went into the hedge-fund business.

The result was a misadventure that has lost Russell and its investors lots of money, and led to a partial retreat from hedge funds. At issue are its funds of funds -- umbrella holdings that channel investments into collections of hedge funds. Russell, a unit of insurer Northwestern Mutual, set them up over the past seven years to get in on a lucrative trend.

Now, partly as their performance has slipped and investors have run for the exits, it is winding down three of them....

Shutting down are seven-year-old Russell Alternative Strategies Fund, which had $3 billion in assets as of mid-2007, and four-year-old Russell Alternative Strategies Fund II, with $2.2 billion. The firm also is winding down Russell Diversified Alternatives Fund, which began in 2003 and had $622 million as of last summer.

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