Fears of a fresh spate of hedge fund collapses grew today as it emerged that the $2 trillion industry had put in its worst investment performance during the first half of the year since most credible records began.

The dreadful start, the worst in almost 20 years, was attributed to the slide in world equity markets, the onset of economic gloom in Europe and America and the continued souring effects of the international credit crunch.

Hedge fund returns during the first six months were more dismal than in 1998, when Long-Term Capital Management failed spectacularly, almost bringing the international financial system to its knees and when Russia defaulted on its debt obligations and the Asian crisis raged.

According to Hedge Fund Research, the investment performance among alternative asset managers globally fell by almost 0.7 per cent in June. This took the year to date return to minus 0.75 per cent. The Chicago-based researcher has not recorded such a bad start to a year since it began amassing records in 1990.

It comes as the rate of hedge fund start-ups runs at its lowest level for seven years amid a sharp rise in fund liquidations, particularly among single managers and small teams.

"I'm not going to tell you that it's easy out there," one hedge fund manager said.

The figures suggest that the high-rolling world of London and New York hedge fund managers, characterised by multi-million bonuses in the good years, could come crashing to earth this year.

The industry has only posted one loss-making year, in 2002, according to HFR. Figures published yesterday suggested 2008 may break a six-year winning streak.

Taco Sieburgh, director of research at Liability Solutions, said that when set against the volatility of world stock and bond markets, the performance in the first half was actually relatively strong.

Mr Sieburgh noted that the S&P 500 index in the US fell 13 per cent in the first half and that the Lehman Brothers high-yield bond index was down 1.3 per cent over the same period.

"If you have markets moving that severely, being down less than 1 per cent is not a bad performance," he said.

Mr Sieburgh said investors remained highly confident in hedge fund strategies and there was every chance that managers would return to positive territory by the end of the year.

The hedge fund industry has suffered several high profile collapses since the beginning of the year, including Peloton, the $2 billion bond fund set up by former Goldman Sachs bankers. Numerous London-based credit traders were also caught on the wrong side of the biggest change in market sentiment about interest rates in a generation early this year. Over a seven to ten day period, the City moved from being convinced that interest rates would fall over the near term to the near certainty that rates would rise.

Some managers complained that being the wrong of bets on sterling had wiped out huge chunks of their performance for the year to date.

Hedge funds have never been under such scrutiny. In the past four weeks, the City’s chief regulator, the Financial Services Authority, has introduced stringent new rules governing the short-selling of shares in companies that are carrying out rights issues. The regulator also sharpened up disclosure rules on contracts for difference, a form of spread-betting. Both moves were seen as damaging to hedge funds.