Blue Mountain Capital Management is suspending withdrawals from its $3.1bn Credit Alternatives Fund, becoming the latest hedge fund firm to do so.

Unlike other hedge funds that have seen redemptions soar due to poor performance, Blue Mountain has done relatively well.

For the year to the end of October, the credit fund is down 2.4 per cent.

"Several large fund of fund investors are themselves facing liquidity pressures from their own investors," wrote Andrew Feldstein, the firm's founder, in a letter to investors.

"[As] a consequence, investors have submitted significant redemption notices representing a meaningful percentage of (the fund's) assets under management."

Mr Feldstein said that if Blue Mountain were to sell into markets where valuations remain "exceptional and unprecedented", investors would be left with "severe liquidation costs and a less liquid portfolio".

Since Highland Capital Management announced it was unwinding two of its debt funds a few weeks ago, debt markets have been spooked by the prospect of ever more debt sales. By unwinding, rather than merely freezing investors, Highland is buying more time.

It has told investors they may not get their money back for four years.

Such sales and the fear of ever more sales have driven down the prices even of the most senior safe debt to less than $0.70 on the dollar, leading investors to ask for their money back which, in turn, has triggered more sales in a vicious circle.

In addition, banks have been steadily cutting back the amount of money they will lend to credit hedge funds.

They have also called for increasing margin, raising the so-called 'haircut' on some debt securities to as much as 35 or 40 per cent.

Those actions, which some hedge funds complain is predatory, is also leading to forced selling at fire sale prices.

Blue Mountain has come up with an elaborate plan to balance the interests of those who want out of the fund with those who are staying in.

However, if investors don't approve, the firm warned "we will likely suspend all redemptions until these illiquid markets abate".

The firm is asking investors to either redeem or exchange their existing investment into several categories, with varying lock-ups of their money and fees.

Those who agree to longer lock-ups will be charged lower fees, in a trade-off that is likely to be adopted by other hedge funds over time.

In its letter to investors, Blue Mountain added that implementation of this plan partly depends on "dealer behaviour".

One of the principal lessons of the past few months is that the Achilles heel of many hedge funds is the ability of investors to pull their money on short notice.

Blue Mountain formerly allowed investors to withdraw their money with 90 days' notice at the end of any month after the first year.