Worried investors pull $31bn out of hedge funds

Terrified investors have pulled $31bn (£18bn) from hedge funds in the past three months, in what has been described as the "worst quarter in industry history".

Huge losses on slumping investment performance and record client withdrawals have wiped $210bn from the industry between July and September, according to Hedge Fund Research (HFR). The figures were published as another London-based fund came under increasing pressure.

The most shocking quarter in the industry's history has seen the year's capital flows turn negative, with the industry predicting consolidation in the run-up to Christmas.

HFR said the £210bn decline in size of the hedge fund industry "represents the largest historical quarterly decline since 2005," as total capital fell from $1.93 trillion to $1.72 trillion at the end of the second quarter. It added that client withdrawals proved "the largest net capital redemption in the industry's history", entirely offsetting the inflows during the first half of the year.

The latest company to feel the heat is Gradient Capital Partners, founded by Ivor Farman and Scott Pagel, with reports that investors fear for its future. The company refused to be drawn on any details yesterday and would only say: "We have no plans to close".

The Hedge Fund Implode-O-Meter, which some industry insiders use to track industry blow-ups, is now on 84 funds at 53 companies since the onset of the credit crunch in mid-2007. These include the high-profile blow-up of Peloton Captial Partners, Carlyle Capital Corporation and Dillon Read Capital Management

The data company compiles a hedge fund index, which declined almost 9 per cent in the third quarter, which "suggests that 2008 could be the first negative calendar year for hedge fund performance since 2002".

Kenneth Heinz, president of HFR, said: "The current financial crisis presents many similarities to the financial crisis in 1998, certainly as it pertains to the hedge fund industry."

HFR tracks more than 13,000 funds to compile its report.