Pentagon Capital Management, a hedge fund run by Lewis Chester, a Tory donor and friend of David Cameron, today became the latest to fall victim to the credit crunch.

Chester decided to close the fund, which has about £1 billion under management and is based in Knightsbridge, after the US Securities and Exchange Commission filed a civil complaint against him and one of Pentagon's old funds last week.

He has written to Pentagon investors telling them he is winding down the fund and returning their money. It is thought Chester told investors that, in the wake of the SEC complaint, lenders would become nervous about backing the group and force it to sell assets in a falling market.

Investors have included publisher Richard Desmond, property tycoon Gerald Ronson, who was involved in the Guinness Four share-trading scandal in the Eighties, and Tony Blair's controversial fundraiser Lord Levy. Chester was at Oxford with Cameron, and has donated thousands of pounds to the Conservative Party.

The SEC complaint is thought to be related to trading between 1999 and 2003 in mutual funds carried out by Pentagon's old fund. Pentagon is said to be preparing to fight the action.

The closure comes as the Mayfair and St James's hedge fund industry faces a major crisis. ABN Amro says the credit crunch could be the "nail in the coffin" for hedge funds, with dozens more under threat.

It adds that the collapse this month of London-based Peloton Partners, the $3 billion (£1.5 billion) hedge-fund manager run by ex-Goldman Sachs star Ron Beller, could result in a "protracted round of unwind" as investors call for their money back, and banks tighten lending conditions.