Carlyle Capital Corporation (CCC), a unit of the private equity firm Carlyle Group, has said it will not be able to meet lenders' demands for money.
Carlyle Capital shares were listed in Amsterdam in July 2007
The US mortgage-backed bond fund will collapse if, as expected, its lenders seize its remaining assets.
CCC's problems are the latest sign of the credit market turmoil that has prompted billions of dollars of losses at some of the world's biggest banks.
Other investment funds may now face similar problems, analysts fear.
In the past year, global banks and hedge funds have been buying mortgage-backed securities, which offered strong returns and were seen as relatively safe investments during the US housing boom.
However, they have fallen in value after higher interest rates led to a drop in the housing market and a surge in mortgage defaults, especially in the sub-prime sector which focused on clients with low incomes or poor credit.
"There will be some very scared people in hedge-fund land today," said BBC business editor Robert Peston.
"Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish," he added.
CCC's problems came to a head last week when it became apparent that it was not going to be able to service its debts.
Some of the banks that had lent CCC money started liquidating assets, and the Dutch-listed fund's shares were suspended.
On Wednesday, CCC said that it had not been able to refinance its business. It said it had so far defaulted on about $16.6bn (£8.1bn) of its debt and the only assets it had left were US government AAA-rated residential mortgage-backed securities.
CCC said it also expected to default on this after the portfolio's value was marked down again on Wednesday.
"Almost within the blink of an eye, a business that had borrowed $21bn from the world's biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput," said BBC business editor Robert Peston.
"Such is the whirlwind blowing through global financial markets."
CCC's collapse will lose its clients some $600m.
The irony of CCC's problems is that the measures brought in to help ease the global credit crunch, may actually have exacerbated the situation.
Earlier this week, the US Federal Reserve, the Bank of England, the European Central Bank and other central banks said they would pump $200bn into financial markets to stimulate lending.
As part of their plan, they would allow lenders to put up the problematic mortgage-backed securities as collateral for the new central bank-backed loans they were offering.
However, instead of underpinning the mortgage-backed securities market, it seems to have had the opposite effect, giving lenders an opportunity to dump the risky asset.
"The Fed's new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do," said the BBC's business editor.
"So it would be rational for the banks to take Carlyle's assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid."