Yesterday research house Morningstar issued an ‘avoid’ warning – its lowest ranking – for the COF. The fund dropped 14% in October alone, Morningstar said, and “further substantial declines cannot be ruled out”.

“We believe that the risks for this strategy have intensified, because of continuing dysfunction in credit markets and the liquidation pressures building in this sector,” the Morningstar report says.

The fund invests in a range of underlying global credit managers, which make up about 70% of the fund, with the remainder in direct CDOs and cash. Morningstar said the COF losses were amplified by a high degree of leverage in the underlying funds.

The research house said similar funds have been forced to freeze redemptions and advised COF investors to get out while they could.

“We also have less confidence than we did a year ago in ING's ability to manage this kind of complex investment strategy. Investors in the Credit Opportunities Fund must provide a minimum 180 days' notice for Redemptions,” the Morningstar report says. “The time has come to do so.”

The COF launched in November 2006 but never proved as popular as ING’s other credit-oriented funds – the Diversified Yield Fund (DYF) and the Regular Income Fund (RIF) – with current funds under management of between $9-10 million.

Collectively, the now-frozen RIF and DYF garnered about $850 million from New Zealand retail investors but have now more than halved in value with current unit prices of about 39 cents and 49 cents respectively.

The ING spokesperson said both funds remained difficult to price accurately with no buyers for the underlying assets. He said the RIF and DYF, which are both 100% hedged, have also been hit by the falling NZ dollar.

“We have enough liquidity in the funds to cover the hedges,” the spokesperson said.

He said ING was also “still looking at options” to unlock funds for RIF and DYF investors with an announcement imminent.