Hedge funds will be decimated by the global financial meltdown and the crisis will wipe out as much as three quarters of the money they manage, George Soros, the billionaire investor, predicted in Washington yesterday.

His comments were made as he fielded hostile accusations in the US House of Representatives that hedge fund managers had enjoyed “unimaginable success” even though they were “virtually unregulated”.

Ordered to testify before the House Oversight and Government Reform Committee, the world’s wealthiest and most secretive hedge fund managers answered questions as lawmakers tried to work out who was to blame for America’s financial crisis. Apart from Mr Soros, those summoned to testify about the role of hedge funds, their tax status and regulation included John Paulson, who runs a hedge fund that bears his name and who was one of the first investors to bet that housing prices could decline on a national basis last year.

He was joined by Philip Falcone, senior managing director of Harbinger Capital Partners, James Simons, who runs Renaissance Technologies, and Kenneth Griffin, chief executive of Citadel Investment Group.

Henry Waxman, a California Democrat and the committee chairman, said that he had singled them out because each earned more than $1 billion (£670 million) last year. Mr Waxman said that they had benefited from the tax system, which allowed their earnings to be taxed at the lower capital gains tax rate, rather than as income.

He said: “That means at least some portions of their earnings could be taxed at rates as low as 15 per cent. That’s a lower rate than many teachers, firefighters or plumbers pay.” The hedge fund industry – estimated to control about $2.5 trillion of assets, mainly outside regulatory supervision – has been blamed for volatility in stock markets and destabilising a number of banks. Hedge funds have also been accused of seeking to trash companies by short-selling their stock – a trade in which the dealer benefits if the share price falls.

The first cracks on Wall Street started to appear in June 2007 when UBS and Bear Stearns both admitted to massive losses within their own hedge funds. UBS was forced to close its hedge funds and Bear Stearns had to bail out its own.

As Washington debates how to prevent another colossal financial crisis, some critics are calling for heavy regulation of hedge funds.

However, Mr Soros cautioned against “going overboard with regulation”. He said: “Excessive deregulation has inflicted enormous losses on the general public and there is a real danger that the pendulum will swing too far the other way. The bubble has now burst and hedge funds will be decimated. It would be a grave mistake to add to the forced liquidation currently dislocating markets by ill-considered or punitive regulations.”

Hedge funds have lured a growing number of ordinary investors, pension funds and university endowment funds, so that millions of Americans unwittingly invest in the funds indirectly.

Tom Davis, of Virginia, the committee’s senior Republican, said that hedge funds “now pose a very public peril when the bets go bad”.

The funds, which are delivering their worst-ever returns this year, have been widely blamed for contributing to the downfall of both Bear Stearns and Lehman Brothers. But Mr Falcone defended the industry, saying: “The behaviour of institutions in several financial sectors contributed to the crisis, but, in my view, the hedge fund sector was not among them.”

He also defended short-selling, arguing that it was a valuable component of financial markets and did not drive companies out of business. Two months ago, the SEC briefly banned money managers from shorting 1,000 financial stocks.

David Ruder, a former chairman of the US Securities and Exchange Commission, which in recent years tried and failed to force hedge funds to register with the agency, also played down the industry’s role in the credit crunch.

He said: “They do not seem to have played a major role in the events precipitating the crisis.”

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