Hedge funds and their investors are suffering their worst-ever returns with the average fund down 17.7 per cent, causing many to ditch the vehicles. The industry shrunk 9 per cent to $1.5 trillion in October, when investors pulled out $40 billion, according to media reports.

William Fleckenstein, one of a small number of hedge fund managers who bet exclusively on falling stock prices, is shutting down his short-only portfolio, joining a long list of people exiting the business.

"I no longer want to run a short-only hedge fund, as it is very stressful, nerve-racking and generally not very much fun," Mr Fleckenstein, who runs Seattle-based Fleckenstein Capital, told readers of his Daily Rap site.

Broadening his horizons, Mr Fleckenstein said he plans to spend 2009 setting up an investment vehicle that "won't be a hedge fund, which hopefully will be available to everyone."

Mr Fleckenstein founded his fund in 1996 to "step aside from the madness" of the late 1990s when he felt Federal Reserve chief Alan Greenspan was "fomenting an environment that would lead to disaster."

With the US facing its deepest economic crisis since the Great Depression, Mr Fleckenstein recognises opportunities to short stocks are shrunk. "Compelling opportunities on the short side are not as abundant as they were just a few months ago," he said.

As a group, hedge funds that specialise in shorting stocks or betting the price will fall have outperformed all rivals this year, returning 31.54 per cent since January, data from Hedge Fund Research show.

Still, their work has been impeded by global regulators legislating to try and slow the sharp decline of financial stock prices. Many fund managers have said these sorts of prohibitions will drive them out of business.

Indeed, hedge fund managers such as George Soros have predicted a dramatic collapse in which two-thirds of the industry's estimated 9,000 funds may fail.

But it is worth noting that in November a barometer of average hedge fund returns shows that the sector fell by 0.71 per cent, which is far less severe than the drop in main global equity indices, for example.

The Credit Suisse/Tremont Hedge Fund Index, based on 69 per cent of returns received, has fallen by 16.14 per cent since the start of 2008. The heaviest fall has been among fixed income arbitrage hedge funds, showing a loss in November of 3.72 per cent, translating into a year-to-date fall of 26.8 per cent.

Although hedge fund returns have been mostly poor this year, equities have fared far worse. For example, the Morgan Stanley Capital International World Index of developed economies’ equities fell by 6.72 per cent and is down by 43.8 per cent since the start of this year.