Every week at least one British hedge fund is considering winding up its funds as catastrophic investment performance puts the sector under unprecedented pressure, an industry expert said yesterday.

Andrew Shrimpton, the former head of hedge fund regulation at the Financial Services Authority who now runs Kinetic, a consultancy, said: “The credit crisis is definitely kicking in for the hedge fund industry now. We are being approached by hedge funds considering voluntary fund liquidations on a weekly basis.”

His remarks came as CQS, one of London's best-known hedge funds, wrote to its investors to say that its flagship $4.25billion CQS Fund had fallen 9.42 per cent for the year to date. Michael Hintze, its chief executive and senior investment officer, told investors that senior management at CQS were meeting as often as three times a day to monitor the fund and take action over its exposures where necessary. The fund, which specialises in convertible arbitrage - or small price differentials between bonds and underlying equities - is down more than 11 per cent for the year.

Mr Shrimpton said that turbulent investment markets and worries that investors are rushing to redeem funds were taking their toll on a sector that had experienced unrivalled growth since the turn of the millennium.

He added that the FSA's ban on short-selling shares in the financial sector was hitting individual investment strategies, including long-short equity funds and event-driven funds. “There is a shake-out going on. Everyone is being affected,” he said. He also called on the FSA to drop its temporary shorting ban as soon as stability begins to return to the markets: “Short-sellers add liquidity to the markets; there is a clear case for dropping the ban in more stable times.”

The CQS Fund was set up in 2000 and has returned an annualised 12.26 per cent since inception. Sources said that redemption calls had been minimal. Mr Hintze told investors that a long-term ban on short-selling could force CQS to change parts of its investment strategy. There was no suggestion that the fund would be forced to wind up.

It also emerged yesterday that Toscafund, the $6billion London-based hedge fund run by Martin Hughes, was sitting on substantial paper losses on its investments in Washington Mutual and Sovereign Bancorp, the embattled American savings and loans firms.

Tosca, whose funds have lost more than 30 per cent so far this year, holds a 5.1 per cent stake in Sovereign, whose shares slumped 75 per cent on Monday after Congress voted against a $700billion bailout plan for the American banking system. Sovereign yesterday named Paul Perrault as its new president and chief executive as it secured a $12billion credit line from the Federal Home Loan Bank of Pittsburgh and from the Federal Reserve.

Banco Santander, the Spanish group that has bought Bradford & Bingley's savings book, also became a substantial shareholder.

Tosca owns 6 per cent of Washington Mutual, which was sold to JPMorgan Chase last week after it failed and had its assets seized by regulators.

Hedge funds were bracing themselves yesterday for a rush of redemption calls as investors, particularly the super wealthy, try to withdraw their capital by the end of the year.

One manager at a London hedge fund said: “Investors are scared - they want cash. We are not going to be immune from that.”

He said that it was likely that companies that run funds of hedge funds would be hit particularly hard. Hedge funds have recorded their worst investment performance for the year to date.

Worldwide, hedge funds have lost more than 10 per cent, according to Hedge Fund Research (HFR), the Chicago-based research firm.

Almost every hedge fund investment strategy has recorded losses for the year so far, according to HFR data. Only macro investments and merger arbitrage strategies have posted gains.

CQS and Tosca declined to comment.

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