Feldstein and Demchak later teamed up to raise money for the Darfur Project, which from 2007 to 2009 sponsored airlifts of food and medicine to those affected by conflict in Sudan's Darfur region.

Since starting New York-based BlueMountain in 2003 with Harvard Law friend Stephen Siderow in a spinoff from BlueCrest Capital Management LLP, Feldstein has earned a reputation as a master arbitrager. His hedge fund has generated almost 10 percent annual average returns largely by spotting abnormalities in the price relationships in credit swaps. Rather than bet on whether the price of a company's debt will rise or fall, the fund often takes both sides of the trade and profits when the price relationships revert to normal.

Goldman Counterparty

"Our objective is to avoid placing any bets on these macro outcomes," Feldstein said in a Bloomberg Television interview that aired Dec 22. "We don't think they're very predictable."

With complex trades that can sometimes have more than 100 separate pieces, that strategy also has helped make BlueMountain one of Wall Street's biggest clients.

By June 2008, BlueMountain was Goldman Sachs Group Inc.'s fourth-largest counterparty in the credit-derivatives market, with $590 billion of outstanding contracts, bigger than that of banking giants Barclays Plc and Credit Suisse Group AG, according to a 2010 report by the Financial Crisis Inquiry Commission, a U.S. panel that investigated the credit seizure.

Goldman Sachs at the time was acting as a prime broker for BlueMountain, loaning money and securities and clearing credit- swaps transactions, according to two people familiar with the firm, who asked not to be identified because they aren't authorized to discuss the business.

Saving BlueMountain

The hedge fund's trading book reached the size it did in large part because, rather than tear up the bulk of its swaps when it was ready to close out a position, BlueMountain put on offsetting trades to cancel them out, the people said.

After Lehman Brothers Holdings Inc.'s 2008 bankruptcy, as fears of a cascade of bank and hedge-fund failures gripped markets, BlueMountain faced an exodus of investors, even as its flagship Credit Alternatives Master Fund outperformed an industry average tenfold. Feldstein moved to bar withdrawals and freeze $3.1 billion of assets.

BlueMountain shifted almost all of its trades out of Goldman Sachs. Most of those went to JPMorgan, now the fund's biggest prime broker, perceived by the market at the time as a more creditworthy counterparty, according to a person familiar with the fund. Tiffany Galvin, a Goldman Sachs spokeswoman, declined to comment.