The shadow of disaster has been looming over hedge fund investors for 18 months as indifferent returns tempted the most disciplined of managers to take unwarranted risks.

Nervousness reached a peak in May, when repricing in the credit derivatives market caused heavy losses at GLG and Cheyne in the UK and at Blue Mountain of the US. Jittery investors rushed for the exit in anticipation of meltdown. Those who kept their heads were proved right when the market stabilised in June, only to see Bailey Coates, a London firm that until recently ran $1.3bn (€1.1bn), close its principal fund amid losses.