Hedge funds are continuing to feel the full force of the credit crunch, with 170 funds forced into liquidation during the first quarter, a Chicago research firm reported yesterday.

The bleak figures published by Hedge Fund Research (HFR) also showed that fewer funds were launched over the three-month period than at any time since 2000.

Publication of the report came as speculation was mounting that several London hedge funds are sitting on heavy losses after being caught on the wrong side of a sharp change in sentiment about future interest rates in the past fortnight.

Traders who have sold sterling heavily as part of a gamble that interest rates would fall have been hit by a swing in market sentiment amid widespread worries that the next move in interest rates from the Bank of England will be up.

One hedge fund manager said yesterday that his fund's returns for the year to date had been all but wiped out by the switch in sentiment. He said it had been a test of nerves whether to sell out at a loss or hold his position. The situation has started to improve in recent days, he added.

“We quite like volatility. We like recessions and we like soup kitchens, because that's when we make our money,” he said. “But too much volatility just makes people scared.”

The hedge fund industry has suffered several high-profile failures since the beginning of the year, including Peloton, the $2 billion (£1.01 billion)bond fund set up by former Goldman Sachs bankers that collapsed with heavy losses in January. However, it emerged this month that Geoff Grant, one of the founders of Peloton, was close to announcing a new fund, in an indication of how quickly some well-liked players can recover.

According to HFR, the number of hedge fund closures was 23 per cent higher than the same period last year, when 138 funds were shut in the wake of turbulence in financial markets.

The main casualties were single-manager hedge funds, which accounted for 155 closures. Flat performance at many funds has coincided with reduced appetite for risk among investors, poor flows of funds into the industry and general economic weakness.

Ken Heinz, president of HFR, said: “Investors continue to express a preference for funds with established track records and significant infrastructure.”

In the first quarter 247 funds opened for business, down from 251 during the same period last year, HFR said. Research published this week by Lipper TASS, part of Thomson Reuters, showed that just $2.6 billion of net new capital flowed into hedge funds during the first quarter, an 81percent fall on the previous three-month period.

So far this year, hedge funds have been struggling to generate the kind of substantial returns that have grabbed the headlines in the past and sparked multimillion-pound bonuses for the best dealers.

According to HFR, hedge fund returns are flat for June so far and down more than 0.15 per cent on the year. Even distressed debt funds, absolute return players and hedge funds that take long-term positions based

on currency and interest rate projections - thought to be on track for strong profits this year - have struggled to climb into positive territory, according to HFR's indices, which are updated daily.

Open house

— Hedge funds specialising in betting that share prices will fall are braced for the introduction of rules today that could force them to disclose their trading strategies

— The Financial Services Authority has pushed through measures that will force any investor with a short position of more than 0.25per cent in a company carrying out a rights issue to disclose its position to the stock market

— Traders hoping to profit from selling borrowed shares and then buying them back more cheaply later fear that they may be targeted by rivals if their positions are sufficiently large

— Hedge funds and other investors will have to disclose their exposure only once, fuelling their view that the FSA is acting in the short-term to ensure that a £4 billion rights issue from HBOS, the mortgage bank, is a success

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