Peloton Partners was close to concluding a deeply discounted firesale of its stricken mortgage-backed hedge fund last night in a move that will see $2 billion (£1 billion) of equity wiped out.

The move means that the three founders of the firm - the former Goldman Sachs partners Ron Beller and Geoff Grant, alongside David Watson – will lose their combined $120 million personal investment. The fund’s other investors, including a $700 million injection from Peloton’s second fund, will also lose their money. One source said: “The vast majority has now been sold.”

It is believed that the Peloton ABS fund, which invested in mortgage-backed securities that have been hit hard by the credit crunch, had been forced to sell assets at a 30 per cent discount to meet cash calls from its bankers, led by Goldman Sachs and UBS and 12 other lenders.

Sources said that several hedge funds that have strong cash positions have stepped in to snap up the assets, including GLG Partners and Citadel. “The cash bonds would be of interest to a number of buyers . . . at a discount to face value. Since the securities are rated highly, typically triple and double A, they are generating cash,” another source said.

Peloton’s collapse is particularly surprising because the firm has been one of the high-flyers of the competitive hedge fund industry. It recorded an 87 per cent return in 2007, largely because of the success of its bets against sub-prime securities.

However, at the beginning of this year, it switched its strategy and bet that the highly rated mortgage bonds would continue to rise. But as fears over the international credit crisis have spread, even bonds linked to highly rated mortgages have suffered and their value has fallen.

Compounding its problems, the Peloton ABS fund was highly leveraged, which means that it borrowed money from the banks – about four times the amount of equity – to maximise the amount of assets that it could buy. As the value of the assets fell, the banks demanded more cash as collateral. Peloton, in the end, decided that it no longer could meet those margin calls and was forced to liquidate the fund.

The failure sent shudders through the rest of the industry amid fears of further forced liquidations. “The most fragile entities that suffer are the hedge funds with leverage,” one source said, adding that other hedge funds invested in the same way could fail, too. “Hopefully, it won’t be too widespread,” the source said.

At four times leverage, the Peloton ABS fund had about $8 billion of assets. A 30 per cent discount implies losses of about $2.4 billion, which wipes out the fund’s equity holders. The global credit crisis has claimed a number of high-profile hedge fund scalps. UBS was one of the first to be hit, spending $300 million on closing down Dillon Read Capital Management, the Swiss bank’s hedge fund business, after running up credit-market-related losses.

As the credit crunch intensified in August, two hedge funds owned by Bear Stearns, the US investment bank, filed for bankruptcy. In the same month, Sowood Capital Management, a Boston-based fund set up by Jeff Larson, a former manager of the Harvard endowment fund, closed its two funds after the liquidity crisis erased much of the funds’ $3 billion in equity.

In September, BlueCrest, one of London’s biggest hedge fund managers, decided to close its $550 million equity fund. A month later, Basis Capital, the Australian fund manager, saw its yield fund collapse. Even Goldman Sachs felt the impact of the crunch last year when it was forced to inject $3 billion into one of its own hedge funds after the black-box fund was hit by stock market falls.

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