In happier times, the bronzes in the window of WH Patterson’s gallery in London’s Mayfair would have been quickly snapped up. Their titles — Lioness Attacking, Lioness Stalking and Cheetah I and II — would have appealed to the hedge-fund managers who work in the area and fancy themselves as financial-market predators.

To them, the asking price of £10,000-plus would have been little more than small change; but those days have gone and the hunters are rapidly becoming the hunted.

A handful of managers in London and New York were forced last week to liquidate funds, including the flagship funds at MKM Longboat and Powe Capital, as investors demanded their money back. It is only the beginning.

Experts are predicting a 30% reduction in the hedge-fund industry — there are roughly 10,000 funds worldwide, and the industry is worth approximately $2 trillion. One broker said: “Small firms are bleeding. Assets are being sold off, investors are redeeming money and the managers are scuttling off to work somewhere else.”

The firestorm is expected to be quick and violent, and it has been brewing since the credit crunch began more than a year ago. It claimed a number of high-profile casualties such as Peloton this year. But events of the past three weeks, including the collapse of the investment bank Lehman Brothers, which froze billions of dollars of hedge-fund trades, a ban on shorting stock, volatile markets and the evaporation of credit, have created a deadly climate.

Nick Roe, global head of equity finance at Citigroup, said: “There will be a proliferation of hedge funds at the small and mid-size winding down. The hedge-fund universe will be smaller in 2009.

“I didn’t think the shake-up would happen in such a violent and fast manner but a correction was needed because there was too much cheap money being offered.”

Hedge funds have been blamed by politicians, trade unions and even the clergy for the financial crisis. One hedgie explained his lot: “I have personally lost money, my client has lost money, the regulator is making it harder to do business and I can’t even go to church as the archbishop doesn’t think much of me either.”

Few will pity them. During the good times they paid themselves unfathomable amounts of money. Their chauffeur-driven cars with black-tinted windows clogged the streets of Mayfair and their bulging wallets helped to fuel the capital’s housing boom.

Unlike the old-fashioned, long-only fund manager, they could make money during the bad times as well as the good. They called this “absolute” performance and charged investors a 20% performance fee, on top of a 2% management fee.

Almost two-thirds of all types of hedge funds have performed negatively in the past year, according to Hedge Fund Intelligence’s European Index. Neither have individual funds covered themselves in glory. RAB’s special situations fund is down 55% for the year and Tosca Fund’s Class A fund 39%.

Funds proliferated because of the easy availability of cheap money. It also allowed some amateur managers into an industry that was charging professional rates.

John Godden, head of hedge- fund consultant IGS Group, said: “Pre-2000 hedge fund managers came from the most skilled echelons of the asset- management sector but recently the average quality and skill of managers has deteriorated. The industry will revert to the way it was when there were far fewer players and a higher level of skill.”

Funds that are highly leveraged or strategies, such as arbitrage, that rely on being heavily geared — that is, using borrowed money — are in the line of fire as credit has dried up.

One hedge-fund manager said: “The leverage that can be provided is going to be lower and the fees charged by the prime brokers are going to be higher, which will squeeze margins for the investors.”

Poorly performing small to medium-sized funds are at risk because they cannot adapt their trading strategies to suit volatile markets or sudden changes in regulation (such as the ban on short-selling).

They also lack the clout to impose “lock-ups” or restrictions on investors withdrawing money for a longer period. This move is saving many larger funds, such as RAB’s special situations, which convinced investors to leave their money in for three years in exchange for lower management fees.

But this is fundamentally a Darwinian industry and the surviving hedge funds will emerge stronger.

Alex Ehrlich, global head of prime services at UBS, said: “The era of cheap leverage is over, but the laws of investment physics have not been repealed. Good managers may have been embarrassed by the strength of the hurricane, but in the end performance will return. The damage will be repaired.”

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