Luxor Capital, a $3.8 billion hedge fund that has been losing money for months, said on Monday it will not be returning exiting investors cash in full, keeping a portion locked up until some illiquid investments can be sold.

Instead of returning all exiting clients' assets in cash, investors will receive 88 percent of their money back while 12 percent of the investments will be held in a so-called special purpose vehicle, Luxor's founder, Christian Leone, wrote in a letter seen by Reuters.

The announcement comes before a critical March 31 redemption deadline and aims to treat all investors "fairly," the letter said.

"For those investors in the Fund that have submitted withdrawal requests for March 31, 2016 and for subsequent withdrawal dates, we will transfer a pro rata share of the applicable assets into a special purpose vehicle (SPV)," Leone wrote.

Only clients who asked to get their money out on April 1 and July 1 will see a portion of their money put into the SPV and the fund will not charge any fees on these assets.

Special purpose vehicles and side pockets are permitted at hedge funds but they are often viewed as a last resort that sour investors, and they have not been widely used since the 2008 financial crisis when many hedge funds posted heavy losses.

But consultants have said that if illiquid positions become large, then it is prudent to segregate them and not charge fees until gains are realized.

After sending the letter, Leone held a brief conference call with investors where he identified the four illiquid securities being put into the special purpose vehicle. Together they make up 12 percent of the portfolio, he said.

They include food delivery service Delivery Hero, which Leone said makes up more than half of the exposure and has seen a "multifold appreciation since we initially made the investment." Additionally private equity investments in online food ordering service Foodpanda and drilling company Ascent Resources are in the SPV as well as preferred stock of Altisource Asset Management.

Leone told investors that clients have redeemed roughly 10 percent of their money in the first quarter and that redemptions requests are expected to be similar in the second quarter.