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Last Updated: Friday, 29 February 2008, 11:22 GMT
Credit crisis claims hedge fund
Money
Hedge funds typically borrow money to maximise their positions
A London-based hedge fund has become the latest victim of the credit crisis after Peloton Partners began shutting a $2bn (1bn) fund due to severe losses.

The hedge fund firm told investors in a letter, seen by several news outlets, that another fund also faced problems.

The liquidation highlights the severity of the problems in credit markets - the fund had been a big success, boasting an 87% return in 2007.

It is the latest hedge fund to be burnt by the credit crunch.

"The fact that Peloton (one of the more successful funds) was forced into liquidation does not bode well for the sector," said Simon Denham, managing director at Capital Spreads.

"A great number of very wealthy people have much of their assets locked up in various highly geared hedge funds of this nature."

Borrowed money

The extent of the crisis in the US housing and credit markets first became clear when Bear Stearns was forced to liquidate two of its hedge funds last summer.

Peloton's fund, known as ABS Master Fund, had bet that sub-prime mortgages would decline in value and instead had focused on better quality US home loans.

But these investments have also become tainted by the problems in the sub-prime market, resulting in a steep decline in their value.

"Its problem was that it appears to have been leveraged to buy reasonable quality but now illiquid asset-backed securities," said Mr Denham.

"With the credit crunch draining away cash, the company was unable to finance the exposure."

The fund was founded by former partners at Goldman Sachs, Ron Beller and Geoff Grant.

Hedge funds are private investment funds that attract wealthy investors and generally make more complicated and higher-risk investments than traditional investment funds.

They typically borrow money to maximise their positions but this means they are particularly vulnerable to any sudden market crisis as they have to meet lenders' demands.



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