The world’s $2 trillion hedge fund industry faces a potential flood of pullouts by disgruntled investors today because clients with 90-day notice terms must now inform funds if they wish to get out by the end of the year.

As WealthBriefing has recently reported, many hedge fund administrators can, however, impose emergency restrictions on pullouts, often using fine print in contract clauses to do so.

The last few months have been a torrid time for the hedge fund industry. Regulators in the US and UK have banned or heavily restricted short-selling in a bid to prop up the stock market, a move that hits a key tactic of hedge funds. However, the industry has warned that banning short-selling is a temporary relief to the market and will be counterproductive, as shorting adds to overall market liquidity.

Hedge funds, on average, have lost 4.85 per cent in value since the start of the year, according to data to the end of August compiled by Hedge Fund Research. Data based on a narrow snapshot of returns shows that since the start of January and 26 September, funds have fallen by more than 10 per cent.

Earlier this month, HFR said that more than 180 hedge funds were liquidated in the second quarter of 2008 as markets remained volatile, putting the total number of liquidations in the first half of this year at 350, a rise of 15 per cent from a year earlier.