Man Group, the world's largest hedge fund manager, sent a ripple of fear through the hedge fund industry today as it disclosed that rates of return at its flagship funds, AHL Diversified, fell 4.8 per cent last year.

The performance at AHL, which was hit by the China-prompted market correction in February, will have wiped millions off the value of its assets and cut returns for Man's legions of institutional and retail investors. It was largely responsible for a 20 per cent slide in income from performance fees to $358 million generated last year, Man said.

The setback to the funds eclipsed a 13 per cent increase in pre-tax profits from asset management at Man of a record £1.3 billion and prompted worries that other funds would have suffered similar losses.

It came just days after Goldman Sachs disclosed in a report to investors that returns on its $10 billion Global Alpha fund had fallen 3.4 per cent in the first four months of the year, in part as a result of investments in bonds and currencies went against it. Goldman Sachs declined to comment on any losses.

Michael Long, an analyst at Keefe, Bruyette & Woods, said: "AHL is a fund that looks for trends in difference asset classes that have low correlations to each other. There are other funds that pursue similar strategies and try to do similar things because they are based on the same principles.

"These correlation patterns that they study and rely on break down every so often and this causes things to go against them."

Mr Long said AHL's main assets include currencies, bonds, energy and equities and that other "managed futures funds" could have similarly underperformed the market.

According to Chicago-based Hedge Fund Research Inc, which compiles data on returns, the average hedge fund improved by 4.9 per cent over the first four months of the year.

While the two funds were hit by different market forces, this represents the latest evidence that the shine could be coming off the investment activities of hedge funds.

At its height, the booming alternative investment market was generating returns for investors of comfortably above 40 per cent and generating a flurry of new players and multi-millionaire managers.

Man, which said it was perfectly usual to report short-term performance declines over periods such as one year, said assets under management since its financial year-end had risen by $3.5 billion to more than $65 billion. It said it was "very confident about the prospects for the year ahead".

Early worries about the performance of AHL held back Man's share price, but during the afternoon it reclaimed gains to stand 6.5p higher at 585.5p.

"This is not the first time AHL has had falling returns. It was much worse a couple of years ago," Mr Long said. "Recently AHL has been doing well. People have been aware of the funds suffering but the outlook is positive. Things are going to get better, unless you have a view that there is going to be some sort of market correction this summer."

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