One of London’s most successful hedge funds imploded yesterday when Peloton Partners put the assets of its $2bn (£1bn) flagship fund up for sale and froze its remaining fund after geared mortgage bets left it unable to meet lenders’ demands. Financial Times

The Peloton ABS fund, named best new fixed income hedge fund last month, is the latest victim of the spread of the sub-prime crisis into high-quality mortgage securities, which hit fresh lows this week.

Rumours of the dumping of Peloton’s assets – which had been leveraged to about $9bn, investors said – also hurt credit markets this week as traders anticipated the fire sale.

'It is the classic story of when leverage goes wrong,' one investor in the fund said. 'But I can’t believe this problem is confined to these guys alone.'

The losses are striking because Peloton ABS was one of the big winners from the US subprime crisis, gaining 87 per cent last year after betting against lowquality mortgages.