Dec. 16 (Bloomberg) -- R3 Capital Management LLC’s $1.5 billion hedge fund lost 31 percent in the first six months after it was founded by Rick Rieder mainly because its assets were frozen by the bankruptcy of his former employer, Lehman Brothers Holdings Inc., according to three people familiar with the matter. The R3 Capital Master Fund, which opened in May, declined 10 percent in October alone, said the people, who didn’t want to be identified because the information about the New York-based fund is private. Assets held in the prime brokerage unit of Lehman, which filed for bankruptcy in September, accounted for about two thirds of R3’s losses, they said. Final November returns haven’t yet been provided to clients, the people said. “I guess that’s the price you pay for being loyal to Lehman,” said Adam Sussman, director of research at Tabb Group LLC, a New York-based adviser to financial-services companies. “Lots of hedge funds are running losses after being loyal to just one prime broker.” Rieder, 47, started R3 with a $1.1 billion investment from Lehman. The investment bank also sold R3 $4.5 billion worth of assets, mainly corporate bonds and loans, in the second quarter, according to regulatory filings. The fund invests in loans and bonds as well as distressed debt, insurance products and aviation assets. Thor Valdmanis, a spokesman for R3, declined to comment. The firm has about 60 employees in New York, London and Singapore. Prime Brokers Hedge funds including Harbinger Capital Partners lost money after using Lehman’s prime brokerage unit in London, whose accounts were frozen when the company filed for protection from creditors on Sept. 15. Prime brokers provide loans, clear trades and handle administrative chores for hedge funds. Discounting assets tied up with Lehman, R3’s losses on its investment portfolio is about 10 percent in its first six months of trading, the people said. Hedge funds, which are private, largely unregulated pools of capital, have lost about 18 percent this year, according to Hedge Fund Research Inc., as they reel from slumping stock and commodity markets and a credit freeze. Lehman in October sold its 45 percent stake in R3 for $250 million and made a new $250 million passive investment in R3’s fund, which can’t be divested until May 2011, R3 said in a statement at the time. R3 has since raised $500 million from other investors, the people said. Rieder serves as vice chairman of the borrowing committee for the U.S. Treasury, advising Treasury Secretary Paulson on debt issuance. He joined Lehman in 1987 in the firm’s fixed income group. In 1994 he was promoted to the head of the corporate bond desk and six years later was named as global head of credit. From 2006 he ran Lehman’s global principal strategies group, investing in credit arbitrage, aviation finance and private equity. Before joining Lehman, Rieder worked as a financial analyst at Chase Manhattan and SunTrust Bank.