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Here's a new one. Knight Capital (NITE) may return $68 million in fees of its hedge funds due to lousy returns.

The Jersey City, N.J.-based said in a regulatory filing that it would return all or a portion of the fees related to managing its Deephaven Funds. All three major funds in the Deephaven group, which have $4.2 billion under management, have suffered losses during the first six months of the year, according to a report by Sandler O’Neill & Partners. The Deephaven Event fund is down 12.6%, while the Market Neutral fund is down 5.6%. The small Credit Opportunities fund is down 0.7%.

If these funds continue to loss as much during the rest of the year, Knight could suffer a hit of 16-cents per share. Based on “clawback” clause, Knight could return at least a portion of the incentive fees if the Deephaven Funds suffer a loss in the second half of the year.

The stock is down about 10% today.

Posted by edelfenbein at August 28, 2007 4:04 PM