The decision by the $66 billion money manager, a unit of Royal Bank of Canada, is the latest example of the "key man" risk investors face even at big investment firms when a fund manager leaves.

With much of a mutual or hedge fund firm's value tied up in the brain power of its employees, the loss of an important employee exposes the firm and investors to asset flight which can even force it to sell holdings at a loss.

"His model, a pure hedge fund business with a clear key man risk, is really difficult to digest for a firm which has now been owned for years by a big bank," said Michele Gesualdi, chief investment officer at fund of funds firm Kairos Partners.

"It is a big loss, however, for BlueBay as the fund was certainly quite profitable for the firm," he added.

BlueBay on Thursday said it would return investors' capital in its macro fund, a strategy that typically focuses on major economic trends and can involve bets in stocks, bonds, currencies, commodities and derivatives markets.

"After careful consideration, and in the best interest of investors, BlueBay will close the Macro Fund," BlueBay said.

Typically, hedge funds shut down in response to poor performance or clients withdrawing large amounts of money, but BlueBay has suffered from neither and it linked the decision to the departure of Phillips.

BlueBay's macro fund gained about 6 percent through Nov. 14 this year and 4.3 percent in October, the firm said, in a difficult period for peers. Macro hedge funds, on average, gained about 2 percent in the year to end-October, after losing lost 0.3 percent in October, data from Eurekahedge showed.

A typical hedge fund often uses borrowed money to make big bets in quite illiquid markets to generate outperformance and is founded by one person or small group of people, making it vulnerable to changes in management.

Even though many of the largest fund firms are looking to diversify and become more like mutual funds, the vast majority rely on a single product that is generally dependent on a single manager, with all the investor risk that implies.

"BlueBay seeks to minimise key-man risk through a combination of measures including knowledge sharing through our internal investment forums and investment processes," the firm said in a statement.

(Reporting by Nishant Kumar; editing by Simon Jessop and David Evans)

By Nishant Kumar