Hedged Out

Peloton Partners LLP, the London- based hedge fund manager being forced to liquidate a $1.8 billion asset-backed fund, said it's a victim of Wall Street's reduced lending.

``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,'' Peloton co-founders Ron Beller and Geoff Grant said in a letter yesterday to clients.

Peloton joins Thornburg Mortgage Inc. and Sailfish Capital Partners LLC on the growing list of funds and companies that have had to sell securities or shut down after banks restricted how much they could borrow, or demanded more collateral as values of securities backed by mortgages slumped. The world's biggest financial institutions are cutting off lines of credit to hedge funds after at least $163 billion of asset writedowns and market losses.

``More hedge funds will blow up this year than ever before,'' said Michael Hennessy, who helps oversee $10 billion of hedge fund investments at Morgan Creek Capital Management in Chapel Hill, North Carolina. ``Financing is much harder to get. The bubble has burst.''

UBS AG, Goldman Sachs Group Inc., Merrill Lynch & Co. and Deutsche Bank AG were among the firms that lent money to Peloton, said people with knowledge of the matter, who declined to be identified. Officials at the banks declined to comment.

Freeze on Redemptions

Peloton said yesterday in a separate letter to investors that it froze customer redemptions from its $1.6 billion Multi- Strategy Fund, which has a ``very large position'' in the ABS fund.

Beller and Grant, who founded their firm in 2005, are seeking buyers for mortgage securities held by the ABS fund. The fund provided clients with an 87 percent return last year after the managers bet on a surge in delinquencies on loans to homeowners in the riskiest subprime category. Beller said in a Jan. 25 telephone interview that the firm bought securities backed by mortgages that are safer than subprime.

The price of top-rated Alt-A securities, which rank above subprime, dropped 10 percent to 15 percent this month, according to Thornburg Mortgage, the Santa Fe, New Mexico-based finance company which yesterday said it may sell securities to meet further margin calls, after burning through cash.

``Risk managers everywhere are revisiting how collateral is being priced so you're seeing margin calls,'' said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``As risk appetites decline, the price of assets that are used as collateral decline.''

Sailfish Fund

Beller, 45, led Goldman's fixed-income currency and commodity sales group in London before leaving in 2001 to reorganize New York City's school system. Grant, 47, was co-head of New York-based Goldman's so-called macro proprietary trading group. Grant, who works in Santa Barbara, California, declined to comment.

Sailfish's Multi-Strat Fixed Income fund, which had $1.9 billion in July, collapsed as credit bets went sour and the Stamford, Connecticut-based firm unwound positions into a declining market.

The average price of an actively traded high-yield, high- risk loan tumbled this month to a record low of 86.28 cents on the dollar from 100 cents last July.

Margin Calls

The extra yield, or spread, investors demand to own high- yield, high-risk, or junk, bonds instead of Treasuries widened to 718 basis points from 592 basis points in December, according to data compiled by Merrill Lynch & Co. in New York. A basis point is 0.01 percentage point. Junk debt is rated below Baa3 by Moody's Investors Service and less than BBB- by Standard & Poor's.

Morgan Stanley predicts that the ``substantial and sharp moves in the credit markets'' will lead to the closures of several credit hedge funds, which could put further pressure on prices of mortgage-related securities and derivatives.

Particularly at risk of further credit losses is UBS, which has so far written down $19 billion, according to Huw Van Steenis, a Morgan Stanley analyst in London.

``We feel that UBS has been consistently behind the curve in marks and, worryingly, the worst may not be over,'' he wrote in a report yesterday.

UBS needs to reduce its balance sheet from 2.3 trillion francs ($2.2 trillion) to less than 1.7 trillion francs ($1.63 trillion), and reducing relationships with hedge funds is a likely lever, Van Steenis wrote in an e-mail today.

An increase in margin calls may drive prices even lower, RBS's Hackel said.

``I feel like so many shoes have already dropped, the shoe store should be empty by now,'' he said. ``I'd like to think we're pretty close to the end of the game, but I can't say that with any degree of confidence.''