By Svea Herbst-Bayliss

BOSTON (Reuters) - FrontPoint Partners, a $7.5 billion hedge fund currently embroiled in the U.S. government's fast-moving insider trading probe, has been asked to return $3 billion to its investors.

"The deadline for year-end redemptions has elapsed and we have received approximately $3 billion in total redemption requests," FrontPoint co-chief executive officers Dan Waters and Mike Kelly said in a letter sent to investors on Friday.

Reuters obtained a copy of the letter.

A spokesman for FrontPoint declined to comment.

About half of the redemption requests were related to FrontPoint's healthcare portfolios, which executives decided to liquidate. The portfolios were allegedly at the heart of one of the government's probes, people familiar with the matter said.

Investors in those portfolios have already received their money back, the FrontPoint executives said in their letter.

Investor redemptions at other FrontPoint strategies, however, underscore just how nervous pension funds, endowments and wealthy individuals have become about the whiff of trouble. This week the probe picked up speed when federal agents raided three hedge funds, sent subpoenas to other fund managers, and arrested one executive at a so-called expert network company.

FrontPoint, which offers more than a dozen portfolios to investors, expects to start 2011 with roughly $5 billion in assets, down from $11 billion before the financial crisis, the letter said.

FrontPoint's biggest star is Steve Eisman, who made millions by anticipating the housing market collapse long before anyone else did. Eisman became something of a celebrity in the $1.7 trillion hedge fund world after he was featured prominently in journalist Michael Lewis' best-selling book "The Big Short," which chronicles how a savvy group of traders capitalized on the crisis.

Greenwich, Connecticut-based FrontPoint was acquired by investment bank Morgan Stanley <MS.N> in 2006 and is now being spun off. A Morgan Stanley spokeswoman declined to comment on the redemptions.

Earlier this month, federal authorities arrested Yves Benhamou after charging that he had illegally passed on inside information to a hedge fund manager about Human Genome Sciences Inc <HGSI.O> in 2008.

Benhamou, a French doctor, was overseeing a clinical trial for the biotechnology company and was also consulting with hedge fund managers who specialized in selecting healthcare stocks.

While neither the hedge fund nor the manager was named in the government's case, people familiar with the matter said it was FrontPoint and Joseph "Chip" Skowron, a co-portfolio manager at its healthcare funds. FrontPoint put Skowron, who earned his medical degree at Yale, on leave the same day the government announced its charges against Benhamou.

The arrest of Benhamou and Don Ching Trang Chu, a former executive at an expert-network firm, suggest that the government is probing exactly how hedge funds interact with these types of industry consultants.

(Additional reporting by Elinor Comlay in New York)