It’s the letter that managers hope they never have to write and investors wish they never have to read, especially when a fund is posting good returns. But the dreadful scenario is playing out again, this time at Martello Investment Management, a $1 billion fund of hedge funds shop.

The firm has decided to close up shop and return capital to investors because it has not raised enough assets to run its hedge fund and advisory business, which is where the bulk of its assets remain.

At the end of 2007, each of Martello’s funds had generated positive returns, both cumulatively and in each calendar year, since inception, according to David McCarthy, founder, and performance this year has also been largely positive, with returns through April 14 ranging from a loss of 3.2% to a gain of 5.6%.

The firm recently tried to spice up its portfolio, which consists of global macro, quantitative and relative value managers, by launching the Martello Resources Fund SPC, a commodities-focused fund of hedge funds, with $17 million in assets.

“Despite this performance and more favorable market opportunities for trading strategies, Martello has not been able to achieve sufficient asset growth to operate as we had hoped, which is why we have determined this course of action,” wrote McCarthy.

The firm’s assets will be liquidated over the course of the summer.

McCarthy, a former investment manager for Global Asset Management, founded Martello Investment in March 2002.