London hedge fund Peloton liquidates $2bn flagship fund

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The Independent Online

One of London's highest-profile hedge fund managers, fêted just last month as the most promising newcomer of recent years, is to wind up one of its funds – blaming the credit crisis for a major squeeze across the hedge-fund industry.

Peloton Partners, co-founded by the former Goldman Sachs banker Ron Beller, is liquidating its $2bn (£1bn) Asset-Backed Securities Fund after massive losses and a string of investor defections. And it was also last night considering closing its second, slightly smaller, fund, telling clients they could no longer withdraw their money while it was considering its options. Mr Beller, who founded Peloton with Geoff Grant, is best known beyond the financial world as one of the victims of the Goldman Sachs personal assistant Joyti De-Laurey, who was convicted of stealing £4.3m from her bosses. Ms De-Laurey stole more than £1m from Mr Beller and his wife, Jennifer Moses, who also worked at the bank.

The implosion of Peloton comes just a month after it won the much-vaunted "new fund of the year" prize at the annual Eurohedge awards, based on its 87 per cent return last year.

In a letter to investors yesterday, Peloton blamed the dramatic reversal of fortune at the ABS Master Fund on the freezing up of the asset-backed securities market. The fund had suffered "severe liquidity declines", it said, and could not find the money to cover its liabilities, including creditors' demands for more collateral.

"Because of their own well-publicised issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms which has compounded our difficulties and made it impossible to meet margin calls."

It added: "We have been working night and day exploring every feasible option to alleviate the situation. In the end, the best solution has been to seek buyers."

While no details of the precise loss were available last night, investors are expected to recoup very little from the ABS Master Fund.

And the future of Peloton's other fund – the so-called Multi-Strategy fund, which is thought to be worth $1.6bn – is now hanging in the balance. Approximately 40 per cent of the Multi-Strategy fund is believed to be invested in the ABS Master Fund and yesterday, in a separate letter to investors, Peloton said that the problems with the latter "have had a serious negative impact" on the former.

"We are currently assessing out options," it said. "The directors have determined to suspend the calculation of net asset value, subscriptions and redemptions with immediate effect and until further notice."

The ABS Master Fund invested in a range of asset-backed securities, buying the best quality AAA-rated securities and betting on a fall in the value of lower quality securities rated BB and below. That worked profitably while there was a flight to quality in the credit markets, but the crisis that has engulfed markets since last summer has caused big falls in the value of a wide variety of securities and made trading volatile and sometimes impossible.

What began as concern over rising defaults by mortgage borrowers – and consequently on the mortgage-backed bonds and other derivatives that home loans are now packaged into – has spread into many different parts of the credit markets.

The global hedge fund industry had one of its worst months ever in January, returning -1.8 per cent according to Hedge Fund Research, and the overall figure masks blow-out losses of 50 per cent or more for the worst hit. Investors fear a wave of hedge fund failures this year.

As Peloton conceded in its letter to shareholders, it has also made banks and brokers more cautious about extending credit to hedge funds, many of which rely on large amounts of debt to amplify what might otherwise be meagre trading profits.