The Galleon Group, caught up in the largest-ever hedge fund insider-trading scandal, is liquidating its funds even as investors enjoy one of the firm's best years.

On Friday U.S. authorities arrested Galleon founder Raj Rajaratnam, New Castle Partners' Mark Kurland and four others for their alleged roles in an insider-trading scheme that netted more than $20 million. These six could face up to 20 years of prison if federal prosecutors win convictions.

Earlier on Wednesday, Galleon told employees and investors it was winding down the firm and weighing options to keep the fund's management teams intact. Galleon already has been approached by potential buyers.

Still, in contrast to other hedge fund managers raising the white flag this year, Rajaratnam's $3.4 billion firm until last week had been having a good year.

Its flagship Diversified Fund, which had $1.2 billion last month, rose 22 percent this year -- contributing to a 2,879 percent return since its 1992 launch -- according to Galleon investor updates obtained by Reuters.

Behind that performance were portfolio managers who use proprietary and outside research to develop variant views and seek to arbitrage consensus Wall Street thinking, the firm said. Funds use both fundamental investment and active trading strategies.

The fund, lead managed by Rajaratnam, remains 18 percent below its peak. Among its largest positions were Procter & Gamble Co
, Petroleo Brasileiro (Petrobras)
, Goldman Sachs Group , Wyeth and Google Inc , according to an investor letter.

Diversified Fund never had an annual loss until last year, when it fell 17 percent. Rajaratnam maintained heavy exposure to technology and healthcare companies but currently made consumer companies its largest weighting in stocks.

Galleon's $520 million Buccaneer's Fund was up nearly 14 percent this year. The actively traded fund also remains more than 17 percent below its high water mark, though it had only one losing year since its 2003 birth.

The average hedge fund was up 17 percent through the end of September, after losing 19 percent last year, according to Hedge Fund Research.

The three-year-old Asia-focused Galleon International Fund, with $455 million last month, was up 12 percent. Statistical Arbitrage fund generated returns of 18 percent this year.

Singapore-based Asia Macro Fund, managing $185 million of investments across asset classes, is up less than 1 percent.

After last week's arrest, Galleon clients flooded the firm with redemption requests -- more than a billion dollars' worth as of Monday. All but one of the funds offer investors the chance to withdraw money each quarter, and the next cut-off date is November 15.

Under normal circumstances, cash would then be returned in 45 days, or next January.

(Editing by Steve Orlofsky)