Regulators could be forced to shut down markets for as long as a fortnight in order to stanch the panic beginning to beset the hedge fund industry, a leading expert predicted yesterday.

Nouriel Roubini, a professor at New York University, told a London conference that hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale of assets. He said: “We've reached a situation of sheer panic. Don't be surprised if policymakers need to close down markets for a week or two in coming days.”

Jon Moulton, the private equity investor behind Alchemy Partners, forecast a tidal wave of hedge fund collapses in the next three months. “We estimate 60 per cent of the capacity of UK hedge funds will go this year, through bankruptcies and redemptions,” Mr Moulton told The Times.

Professor Roubini is a former senior adviser to the US Treasury. A well-known bear on economic prospects for the world economy, he predicted in February that a catastrophic financial meltdown was on the way. “This is the worst financial crisis in the US, Europe and now emerging markets that we've seen in a long time,” he told the Hedge 2008 London conference.

There are widespread predictions of calamity in the hedge fund sector, which has been thrown into crisis by the collapse of Lehman Brothers, the Wall Street investment bank, and the ensuing turmoil in world markets.

Andrew Umbers, the chief executive of Evolution Securities, told The Times last night that as much as 25 per cent could be wiped off the value of hedge fund assets under management as a result of the combined effects of performance losses and redemption calls this year. Mr Umbers has predicted that one hedge fund in four will fail by the end of the year. If right, his forecast could mean that hedge funds have lost up to $500 billion (£310 billion) of assets over the full year, having peaked with investments at $2 trillion.

Emmanuel Roman, the co-chief executive of GLG Partners, the New York-based hedge fund, joined other experts yesterday in predicting that hundreds of hedge funds will fail before the year end. “In a fairly Darwinian manner, many hedge funds will simply disappear,” Mr Roman told the conference. He said that regulators would move to impose order on the industry.

Performance at hedge funds has plummeted this year as unprecedented market turbulence and unpredictable changes in economic forecasts, particularly involving inflation, have placed many investors on the wrong side of big directional bets. Investors redeemed about $31 billion of hedge fund assets globally during the three months to the end of September and a further $179 billion was wiped off the value of their holdings by falling markets, according to Hedge Fund Research, the Chicago-based research firm.

Hedge funds lost 4.6 per cent during September, according to EurekaHedge, another research firm, which said that the investment class was on course to post annual losses for the first time since 1998.

Several legendary funds have suffered heavily this year, including Toscafund, which is down 55 per cent for the year to date, and Citadel, which has lost an estimated 27 per cent for investors.

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