Hedge funds delivered their worst performance on record last month as volatile markets and bans on short-selling battered the industry.

Hedge funds worldwide lost 4.6 per cent of their value in September, according to EurekaHedge, a research firm. This was the biggest monthly fall in Eureka's index since it began collating data in 2000. It means that the sector is down 7.7 per cent since the start of the year and is heading for an annual loss for only the second time in its history.

It emerged yesterday that Lansdowne Partners' $7billion (£4.2 billion) hedge fund lost 6.1 per cent of its value in September and was down 11.7 per cent in the quarter.

The hedge fund, run by Stuart Roden and Peter Davies, is one of the most respected players in the London market. The two fund partners told investors in a monthly letter that they were “disappointed at the results for the month and quarter ... We take some comfort from the overall numbers being around our risk-tolerance levels, despite a market environment where volatility was pretty unprecedented.”

Lansdowne, known for its long-term strategy of betting that specific share prices will fall, gained its reputation - and a considerable profit - from taking a four-year short position in Northern Rock, the nationalised mortgage lender.

While the fund is up 1.32 per cent for the year to date, the September fall underscores the turbulence that has beset the hedge fund sector, which has been in sharp decline since the credit crisis hit in earnest last June.

Lansdowne's far smaller UK Strategic Investment Fund, one of four managed by the company, was down by 22.4per cent during the three months to September 30, according to a separate letter to investors. During that period, the FTSE all-share index fell by 13.03 per cent.

It is understood that Lansdowne's fund, which has been shut to new investors for four years, has suffered a small level of redemptions. It is selectively allowing new investors to join the fund, which allows redemptions once a quarter.

Lansdowne declined to comment. Industry sources said that, although the performance had been disappointing, it compared well with the wider market.

Lansdowne has not suffered from the restrictions on short-selling of financial stocks, a ban that was extended yesterday by the Financial Services Authority (FSA) until the end of January.

The Eureka figures will fuel fears of an imminent rout among hedge funds. Andrew Umbers, chief executive of Evolution Securities, said last week that up to one in four hedge funds could go bust before the year end.

However, Hector Sants, the FSA's chief executive, maintained yesterday that most hedge funds were weathering the market turmoil “pretty well”. The regulator sees no reason to introduce further regulation around hedge funds, having carefully scrutinised the sector last year, he said.

Short-sellers will now have to make a public statement only when their position changes. Until now, they have had to make a daily report.

The short-selling ban infuriated hedge fund investors, but was part of a concerted effort to stabilise markets.

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