LONDON (Bloomberg) — Bluebay Asset Management Plc dropped the most since its initial public offering two years ago after the manager of fixed-income investments said it will shut down its Emerging Market Total Return Fund.

The $1.2 billion hedge fund, which accounts for six percent of assets under management, had dropped 53 percent this year, Bluebay said yesterday in a statement. Fund manager Simon Treacher resigned "following a breach of internal valuation policy", it said. He couldn't immediately be reached for comment.

"Marketing other funds may now become very difficult," said Gurjit Kambo, a London-based analyst at Numis Securities Ltd. who tracks the industry. "People become more nervous about putting money into Bluebay."

Bluebay won't retreat from credit-market investments despite "extremely challenging" conditions, chief executive officer Hugh Willis said in the statement.

Bluebay declined 30 percent to 70 pence at 9.32 a.m., valuing the London-based company at £135 million. The shares, which peaked at 568.25 pence in June 2007, fell 80 percent this year.

The Emerging Market Total Return Fund was hurt by "liquidity conditions" and is no longer viable on its own, Bluebay said. The closure means that revenue from funds that bet on both rising and falling share prices will probably be below analysts' estimates, Bluebay said.

The fund was hurt by "a perfect storm" after two wrong bets on cash bonds and credit default swaps, Kambo said. The value of cash bonds failed to rise as Bluebay expected, and credit default swaps narrowed, meaning the perceived risk of default decreased, he said.