UPDATE 1-Peloton hedge fund to liquidate $2 billion ABS fund

(Adds details from letter and other information throughout)

By Dane Hamilton and Svea Herbst-Bayliss

NEW YORK/BOSTON, Feb 28 (Reuters) - Peloton Partners LLP, a London-based hedge fund, became the latest victim of the global credit market crisis when it told investors on Thursday that it was shutting one fund and was considering what to do with another.

"We are writing to inform you that we have today had to take steps to attempt to realise the Peloton ABS Master Fund's portfolio," fund managers Ron Beller and Geoffrey Grant told investors in a letter dated February 28. Reuters obtained a copy of the letter.

The pair, who founded the fund in 2005 after working at securities firm Goldman Sachs (GS.N), told investors they have been working to fix the problems and were now searching for a buyer to provide outside help.

"The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund and we are currently assessing our options," the managers wrote.

Through the end of last year, Peloton ranked as one of the secretive $1.8 trillion hedge fund industry's biggest success stories, as the $2 billion ABS fund boasted an 87 percent return in 2007 on bets the subprime market would decline.

Things changed dramatically this year.

When the market stalled in recent weeks, the ABS fund, backed by a ratio of four-to-five times leverage, chose an "orderly liquidation" to pay off lenders, one source familiar with the fund's recent activities said.

The ABS fund suffered "severe NAV declines" and lenders have tightened their requirements, Beller and Grant acknowledged this in the letter, saying it "made it impossible to meet margin calls."

They also halted redemptions from the $1.6 billion Multi- Strategy Fund, which gained 27 percent last year and had invested roughly 40 percent of its assets in the ABS fund.

Telling investors they "deeply regret recent events," the managers wrote they have been 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."

Industry sources said Citadel Investment Group, which took over assets from failing fund Sowood Capital in 2007 and from Amaranth in 2006, and other large funds were approached to try and breathe new life into the fund.

For hedge funds, which returned roughly 11 percent last year, 2008 has marked a terrible start to the year with many prominent funds posting losses and industry analysts predicting a large number will be forced out of business this year after being wrong-footed by stalled markets.

Peloton has about 70 employees, with 60 in London and another 10 in Montecito, California. (Reporting by Svea Herbst-Bayliss and Dane Hamilton, editing by Leslie Gevirtz)