The international credit crunch was threatening to claim a fresh hedge fund victim last night as London-based Peloton Partners told investors that it was being forced to liquidate a $2 billion (£1 billion) bond fund.

The sale of the Peloton ABS Fund threatens to sink the whole firm, which was one of London’s best-performing hedge funds last year. Sources close to Peloton refused to rule out the possibilty of the hedge fund being forced into bankruptcy. They added that it was too early to speculate about potential losses for the fund or its investors.

Peloton, run by the former Goldman Sachs partners Ron Beller and Geoff Grant, recorded an 87 per cent return in 2007, largely because of the success of its bets against sub-prime securities. However, continued deterioration of credit markets appears to have gone against the firm in recent weeks.

Mr Beller and Mr Grant said that they were “working night and day” to secure the firm’s future and had been forced to seek a buyer.

Speculation mounted last night that Citadel and GLG Partners, two rival hedge funds, were among parties to have declared interest.

Investments of Peloton’s ABS Fund are backed by a range of assets including mortgage loans. The fund is one of only two that Peloton operates. The other, a $700 million fund, was also invested in the stricken portfolio.

Peloton wrote to investors yesterday to tell them it was suspending dealings in the second fund, the Peloton Multi-Strategy Fund, and would no longer try to calculate net asset values.

Peloton said that the move was “due to the poor performance of Peloton ABS Fund, a fund in which the company has a large position”.

Peloton said: “The directors have determined it is in the best interest of the company that the calculation of NAV and dealings be suspended.”

In a letter to investors, Peloton said that ABS had experienced “severe” falls in its asset values because of the liquidity crisis that has gripped the credit markets for almost exactly a year. It said that credit providers, which would include banks, have been “severely tightening terms without regard to the creditworthiness or track record of individual firms”.

Peloton said: “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 and we have been actively pursuing this option and many others in an effort to stabilise the situation.”

The two managers said that they “deeply regret” having to suspend redemptions.

Mr Beller is well-known in the City. Along with his wife, Jennifer Moses, and the former Goldman investment banking star Scott Mead, he was one of several victims of Joyti DeLaurey, the former Goldman secretary convicted of stealing £4.3 million to fund a lavish lifestyle. At DeLaurey’s trial, Mr Beller famously told the jury that he only began to suspect a fraud when he discovered his bank account was “one or two million light”.

It was not clear last night how many investors face losses because of Peloton’s problems or whether its difficulty signalled fresh problems ahead for hedge funds, initially seen as likely to be the main casualties of the collapse in US sub-prime mortgage securities.

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