The Mayfair and St James's hedge fund industry is in a crisis that could see the closure of dozens of funds, with hundreds of highly paid financial professionals coming back on to the market.

Those are the dire warnings from hedge-fund watchers as figures reveal the specialist "absolute return" investment industry is in its worst state since its post-millennium explosion into a multi-trillion-dollar business.

Analysts at ABN Amro say the collapse earlier this month of London-based Peloton Partners, the $3 billion (£1.49 billion) hedge-fund manager run by ex-Goldman Sachs star Ron Beller, could presage a "protracted round of unwind" with any number of casualties.

At issue is a toxic mixture of jittery clients wanting to redeem their investments at a time when the banks are less - if at all - prepared to lend money to highly leveraged funds that need client cash as collateral to borrow more money to maximise returns.

ABN believes the credit tightening could be the "nail in the coffin" for many funds. Worried clients attempting to get their money back at the upcoming quarterly redemption stage have exacerbated matters, with industry data indicating that the number of firms barring or limiting the amount of money they can take out is at an all-time high.

Performance figures from the industry suggest the hedge-fund business could be going into a profound downturn.

The number of new funds created has fallen by 12%, the amount of new money raised by the industry has dropped by 10% and hedge-fund losses are running at more than 2% a month.