NEW YORK (Reuters) - Peloton Partners LLP, a London-based hedge fund manager that formerly held nearly $3 billion in assets, is liquidating its two funds and shutting down, the firm told investors on Wednesday, according to two people familiar with the situation.

Last week, Peloton told investors it was liquidating its $2 billion ABS Fund after some 14 lender banks pulled back on credit. It held out hopes it could salvage its second fund, the $1.6 billion Multi-Strategy Fund, even though some 40 percent of that fund's assets were invested in the ABS Fund.

Today, however, the fund told investors on a conference call that the Multi-Strategy Fund is being liquidated, with the proceeds returned to investors, the sources said.

It is unclear at this point what proceeds, if any, investors will get from the liquidation of the two funds, the company told investors.

Peloton, which was founded by former Goldman Sachs Group Inc partners Ron Beller and Geoffrey Grant, declined to comment.

The liquidations are a stark reminder of the inherent risks of hedge funds, which are lightly regulated investment pools for institutional investors and wealthy people.

Last year, the Peloton ABS Fund was among the year's top performers, with 87 percent returns generated through bets that the US sub-prime mortgage market would collapse.

It is unclear how the markets changed for Peloton, but in a February 28 letter to investors, it blamed its lenders for "severe" markdowns in the value of its assets, causing them to pull back on credit. The fund's assets were backed by four-to-five times leverage, or debt, in credit markets that have virtually stalled amid worries about further defaults.

"Although there has not been any material deterioration in the credit quality of the (ABS) fund's assets, given the current liquidity situation in the asset-backed securities market, the fund has experienced severe net asset value declines," Peloton said in the letter.

The firm's collapse comes amid a series of travails by credit hedge funds. On Tuesday, Drake Management said it suspended investor redemptions in its Drake Low Volatility Fund group as of last Friday, a sign that often precedes a shutdown.

Drake Management, founded by PIMCO and BlackRock alumni, manages over $10 billion in various fixed income strategies.

In a statement, Drake said it took the action to prevent investors from "liquidating investments in a market characterised by unprecedented illiquidity" and demands by lenders for increased collateral.

And last month Citigroup Inc's CSO Partners, a formerly $500 million credit hedge fund, suspended investor withdrawals after a 10-percent loss. The fund recently said it has restructured, although redemptions continue to be suspended.