Peloton Partners: New Victim in the Credit Crunch

The economic drumbeat keeps getting louder for Peloton Partners.

The London-based hedge fund firm was forced to put assets of its $2 billion flagship fund — the Peloton ABS Fund — up for sale last week to meet cash calls from its bankers, led by Goldman Sachs, UBS and 12 other lenders.

The sale of the ABS Fund means Peloton's co-founders — former Goldman Sachs partners Ron Beller and Geoff Grant, alongside David Watson — will lose $120 million of their personal investment. The other of the two funds that Peloton operates, a $700 million fund, was invested in the troubled portfolio.

The Peloton ABS Fund was at one time a rising star in the London hedge fund industry. Last year, it gained 87 percent by betting against subprime securities. In recent months, however, the global credit crisis continued to take its toll, causing even bonds linked to highly rated mortgages to suffer and their values plummet.

The ABS Fund also was highly leveraged, borrowing about four times the amount of its equity to maximize the assets it could buy. When the value of the assets fell, banks demanded more cash as collateral. Unable to meet margin calls, Peloton had no alternative but to liquidate the fund.

Several hedge funds with strong cash positions, including GLG Partners and Citadel, are reportedly among the buyers interested in the fund's assets.

Looking Ahead

The demise of Peloton has sent shockwaves through the hedge fund industry. And with good reason. The international credit crisis seems to claim more high-profile hedge fund victims daily. Among the global powerhouses to date:

• UBS spent about $300 million to shut down Dillon Read Capital Management, the Swiss bank's hedge fund business, after facing significant credit-market-related losses.
• Two hedge funds owned by Bear Stearns filed for bankruptcy last August.
• Sowood Capital Management, a Boston-based fund created by Jeff Larson, a former manager of the Harvard endowment fund, closed two hedge funds after the liquidity crisis wiped out most of their $3 billion of equity.
• BlueCrest, one of London's largest hedge fund managers, closed its $550 million equity fund in September 2007.
• Basis Capital, an Australian fund manager, saw its yield fund collapse in October 2007.
• Goldman Sachs was forced to inject $3 billion into one of its own hedge funds — Global Equity Opportunities Fund — last year after the fund lost about 30 percent of its value in one week.

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