Hedge funds cut down to size?

As hedge fund managers returned last week to their plush offices in London’s  Mayfair and Greenwich, Connecticut, many hoped to forget the industry’s worst year on record. But 2009 threatens to bring a detox diet for traders previously held up as among the world’s best – thinning the industry’s ranks and putting in jeopardy the fat fees that turned many “hedgies” into billionaires.

Dismal returns and investor panic are in danger of proving fatal for many funds, following the worst year since Chicago’s Hedge Fund Research started tracking returns in 1980. Losses reached 18.3 per cent as record numbers of funds closed and investors pulled tens of billions of dollars, even from those that made profits.

If that were not bad enough, the image of the industry was further tarnished by Bernard Madoff’s alleged $50bn (£33bn, €37bn) fraud – adding to demands from watchdogs and politicians around the world for tougher regulation.