Prominent hedge fund firm Pequot Capital told investors on Wednesday it will shut down because of a reopened government probe into possible insider trading.

Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction, the firm's founder Arthur Samberg, long one of the hedge fund industry's best-known managers, wrote in a letter obtained by Reuters.

With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser.

In the past, Samberg and Pequot have denied allegations of insider trading.

The fund's closure is likely to reignite controversy over the firing of an SEC lawyer whose earlier probe into Pequot led him to request an interview with John Mack, who is now the powerful head of Wall Street investment bank Morgan Stanley.

The lawyer, Gary Aguirre, said he was fired because of his persistent requests for the interview.

Mack, a friend of Samberg, had worked at the Westport, Connecticut-based hedge fund firm from 2004 to 2005 before taking the Morgan Stanley position in the summer of 2005.

A Morgan Stanley spokeswoman declined to comment.

The SEC's Inspector General last year said there was a connection between Aguirre's firing and his efforts to interview the influential Wall Street executive in connection with the probe.

Pequot, which once invested $15 billion and most recently managed $3 billion, became the target of a Securities and Exchange Commission and U.S. Attorney's office investigation several years ago when investigators reviewed trades made by Samberg in Microsoft stock in 2001 by the Core Funds.

Although regulators and prosecutors brought no charges and closed the probe in 2006, the government reopened the matter in 2008.

Samberg told investors that the firm will spin off two portfolios and liquidate its Core Funds. Fund manager Mike Corasaniti will run the Matawin fund while Rob Webster and Paul Mellinger will lead the Special Opportunities fund as separate entities before the end of the year, Samberg said. Other investors will begin to get their money back by the end of next month.

Samberg's illustrious career has included growing Pequot into one of the world's most powerful hedge funds and being counted among industry leaders whose opinions could move markets.

The 68-year-old trader, who famously once had a basketball court built in his offices for his employees, started his career by focusing on stocks. He later moved into other areas.

Now he joins the growing ranks of shuttered hedge funds, a list that also includes his former partner, Dan Benton, who shocked investors by his decision to close down last year.

For years, Samberg's fund beat the broader stock market, and its recent performance would not appear to make a shutdown necessary. Since it was launched in 22 years ago, Samberg's fund earned a net annualized 16.8 percent while the Standard & Poor's 500 index returned 8.5 percent.

Last year hedge funds delivered their worst-ever losses of 19 percent last year.

Skittish investors including pension funds are especially nervous about problems like SEC probes right now and some industry analysts speculated that some investors were ready to pull money out.

(Reporting by Svea Herbst-Bayliss; Additional reporting by Phil Wahba and Dan Wilchins; Editing by Gary Hill)