Hedge funds worldwide are heading for their worst monthly performance in almost ten years amid signs that the credit crunch is claiming fresh victims across the investment markets.

Industry experts predict that there will be a shakeout of the hedge fund industry this year, with a rash of collapses among funds with less than $10 billion under management.

Sources said that last week's stock market volatility would have hit some managers hard, raising question marks about their reliance on equity strategies. Other managers would have made substantial profits despite the market storm, they said.

“The next few months will sort the men from the boys. January has asked some big questions, as no one was predicting the market movements of last week,” one prime broker said. “But plenty of hedge funds are making money in the current environment, even as there are those making losses.”

Global hedge fund returns fell 3.1per cent in the month to last Thursday, according to the most recently available HFRX indices, published by the Hedge Fund Research (HFR) organisation in Chicago. That was the worst monthly performance since mid-1998 and outstrips negative performances posted by many hedge funds last August, at the height of the turmoil in credit markets.

According to HFR, strategies based on predicting market trends, particularly in equities, have suffered heavily since the beginning of this year.

Eurohedge, another respected tracker of hedge fund performance, recorded a positive return for 2007 as a whole for every investment strategy it followed. Eurohedge noted losses for only three strategies - US dollar-denominated credit investments, currency strategies and convertible and equity arbitrage, also in dollars.

Sources familiar with compiling indices emphasised that much could change over the coming days. With relatively small movements in international markets, hedge funds could easily return to positive territory for the month. They also noted that many hedge fund closures recorded in recent weeks were routine. Many of these funds were making money rather than losing it, they said.

Tough conditions for hedge funds come as other investors also suffer from the market turbulence. Latest monthly figures from the Investment Management Association published yesterday showed that sales of individual savings accounts (ISAs) were dramatically down on last year, at only £17 million, compared with £106.6million. Individual savers pulled a hefty £844 million of investments last month, of which £242 million was from embattled property funds, according to the IMA.

Richard Saunders, chief executive, described last year as satisfactory but noted that the outlook over coming months was much more uncertain.

Candover, the private equity group, said that the high cost of borrowing had forced several deals on to the back burner and meant that only three deals worth more than €1billion had been completed.

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