By Sam Forgione

NEW YORK (Reuters) - Steven A. Cohen's SAC Capital Advisors, by the end of Monday, will be on its way to becoming a much smaller hedge fund.

The expectation within the $15 billion hedge fund and the $2.2 trillion hedge fund industry is that SAC Capital's outside investors will submit redemption notices for much of the $5 billion in investment capital that investors did not seek to withdraw during the first quarter of this year.

People familiar with the firm said Cohen is braced for several billion dollars in redemption notices to be submitted by the end of Monday. These people said Blackstone Group LP, the largest outside investor in SAC, opened the floodgates once it notified Cohen in early May that it intended to redeem most of the $550 million that its clients have invested with SAC Capital.

The withdrawals illustrate the toll the government's insider-trading investigation is having on the Stamford, Conn., firm. SAC has boasted average annual returns of 25 percent since it began in 1992.

Blackstone, which manages $46 billion in hedge fund investments, is a bellwether investor in the industry because it invests client money with dozens of well-known managers.

Blackstone has decided to submit a redemption notice because of lingering concerns the firm had about the course of the U.S. government's investigation into allegations of insider trading at SAC Capital.

The final tally on investor redemptions may not be known until Tuesday, as the deadline for notifying the firm is midnight on Monday.

SAC Capital began the year with roughly $6.75 billion in outside capital and, in the first quarter, the firm received redemption notices for about $1.7 billion of that outside money.

About $500 million of the firm's outside capital belongs to SAC Re Holdings Ltd., the hedge fund's one-year-old reinsurance firm that allocates most of its "investable assets" to SAC Capital, according to SAC Re's website. A person familiar with SAC Capital said that money is unlikely to be redeemed.

BLACKSTONE

Blackstone is expected to redeem most of the roughly $550 million it has invested in SAC via its fund of hedge funds and separately managed accounts, according to sources and a letter reviewed by Reuters. Blackstone has declined to comment.

MAGNITUDE CAPITAL

Magnitude Capital, a fund of hedge funds that manages $3.1 billion of client money, began redeeming funds in the first quarter of this year and intends to submit another withdrawal notice for the second quarter, a source said.

IRONWOOD CAPITAL

Ironwood Capital Management, a fund of hedge funds, planned to withdraw about $100 million from SAC after learning earlier in May that SAC was no longer cooperating "unconditionally" with the government in its investigation and might not be able to give investors frequent updates on the probe, a source said.

CHAPWOOD CAPITAL

Chapwood Capital Investment Management, which manages about $1 billion in client money, had no plans to redeem as of May 21. Ed Butowsky, managing director at the Dallas-based firm, said he was "thinking about putting more money" with SAC.

BLUE ALTERNATIVE ASSET

New York-based Blue Alternative Asset Management, which manages $161 million in assets, had a portion of its capital in SAC as of the end of last year, according to a person familiar with the investment. A representative for Blue Alternative declined to comment on the status of its investment with SAC.

TITAN ADVISORS

Titan Advisors, a fund of hedge funds which invests roughly $3 billion for clients, told investors by telephone in late 2012 it would be exiting SAC. It is unclear how much Titan has invested with SAC, but it was the first to signal that it would pull money from the firm as the probe intensified.

(Additional reporting by Katya Wachtel and Manuela Badawy; Editing by Jennifer Ablan and Leslie Gevirtz)

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