Prominent hedge fund firm Pequot Capital told investors on Wednesday it will shut down amid an ongoing government probe into possible insider trading.

Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction, Arthur Samberg, the firm's founder and one of the industry's elders, wrote in a letter.

Reuters obtained a copy of the letter sent to clients on Wednesday.

Pequot, which most recently managed $3 billion, became the target of a Securities and Exchange Commission and U.S. Attorney's office investigation several years ago. While regulators and prosecutors brought no charges and closed the probe in 2006, the government reopened the case in 2008.

Samberg said the firm will spin off its Matawin portfolio and its Special Opportunities fund and liquidate its Core Funds.

(Reporting by Dan Wilchins and Svea Herbst-Bayliss; Editing by Andre Grenon)