CRISPIN ODEY, one of the grandees of the London hedge fund world, said yesterday that the industry could be doomed, likening it to the disaster that was the Lloyd’s of London insurance market in the 1980s.

Most hedge funds had enjoyed the massive benefit of cheap money and would be found wanting by the coming era of rising inflation and interest rates, he suggested.

In a largely negative critique of the industry, Mr Odey said that hedge fund managers would struggle to adapt to the changing environment: “The hardest thing to do is to think in a different way to the crowd, but in an inflation world, hedge funds get killed.”

Lloyd’s imploded when people realised that the participants were hopeless at underwriting risk, he said.

Mr Odey also took a pot shot at funds of hedge funds — the pooled investment vehicles favoured by institutional investors — as “box-ticking organisations”. He said: “If they (hedge funds) rely on funds of funds, it’s a doomed industry.”

Mr Odey, formerly with Baring’s, founded Odey Asset Management in 1991, building it into a formidable hedge fund group with $4.5 billion (£2.4 billion) under management today. He and his wife Nichola Pease, chief executive and a substantial shareholder in JO Hambro Capital Management, are together estimated to be worth £280 million.

Fellow speakers at a round table lunch on hedge funds also pitched into the industry. Richard Oldfield, chief executive of the fund managers Oldfield Partners, said that investors would gradually become disillusioned by poor returns over the next ten years.

“It will end with a whimper, not a bang,” he said, adding that the target returns of 12, 15 or 17 per cent routinely conjured up by hedge funds were “totally fanciful”. He said: “We will look back and realise this was a barmy time,” adding that some hedge funds were walking a difficult regulatory line: some were close to acting as concert parties in bid situations and some were coming very close to front-running — the practice of trading ahead of one’s clients.

“My message is that hedge funds are a con,” he said.

Andrew Clare, Economics Professor at the Cass Business School, said that the industry was hitting capacity constraints. “There must be a limit to the number of smart guys you can crowd into the same small space,” he said.

There was little support for the industry, although one delegate pointed out that in spite of the scepticism, hedge funds had since last October produced two of the best- performing quarters for seven years.

• Crispin Odey revealed that his firm had accumulated a 3 per cent stake in Royal & SunAlliance.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts