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Hedge funds face their worst year since 2011

Hedge funds are on course for their worst year since 2011, as several of their biggest and most popular trades turned sour and some managers were forced to cut their losses.

Wednesday's new and sudden fall in US Treasury yields wrongfooted numerous funds that had positioned themselves for rising interest rates and an improving macroeconomy. Hedge fund bets on tax-driven mergers and on US housing finance giants Fannie Mae and Freddie Mac have also unraveled this month.

Read MoreHedge funds feel the pain, particularly in energy

October is shaping up to be a worse month for some hedge funds even than September, when the industry lost 0.75 per cent.

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Big name managers including so-called "Tiger cubs" Rob Citrone, Philippe Laffont and Chase Coleman, who used to work under veteran hedge fund manager Julian Robertson at Tiger Management, have all fallen into the red as technology stocks have been hard hit.

Claren Road, the hedge fund controlled by Carlyle Group, has suffered an 11 per cent fall in its credit opportunities fund since the start of October.

Read MoreDespite washout, hedge funds not bailing on energy

Some funds have pulled back their positions as financial market volatility has jumped in recent weeks, and more appeared to capitulate on Wednesday amid a flash crash in US Treasury yields.

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The unexpected drop in the price of oil has created cascading losses through popular hedge fund trades, said Mino Capossela, head of liquid alternative investments for Credit Suisse Asset Management. The price of Brent crude has fallen by almost a quarter since mid-June.

As well as using oil as a bet on improving economic growth, funds have also bought energy stocks and bonds. Oil companies have been among the biggest recent issuers of high-yield bonds, meaning that credit funds have also been affected.

"Oil stocks and bonds are both under pressure and because of their earlier strength these are relatively chunky positions for hedge funds," said Mr Capossela.

The possibility that AbbVie will withdraw its bid for Shire has also hurt hedge funds, including some of the largest in the industry, such as Paulson & Co. Shire is also held by Magnetar, Elliott and Janus Capital, and arbitrage players have taken leveraged positions in both stocks, said several hedge fund managers.

The possible abandonment of the deal – following US Treasury department rule changes to discourage so-called tax inversions – comes days after another popular hedge fund trade also went into reverse.

Read MoreCramer on oil: Hedge funds gone wild?

Paulson, Perry Capital, Owl Creek and Bill Ackman's Pershing Square are among the funds to have bet on the common or preference shares of Fannie Mae and Freddie Mac, which fell sharply earlier this month after a court dismissed a lawsuit against the US government that they hoped would restore value to the equity.

Pershing Square Holdings, the vehicle Mr Ackman listed in Amsterdam earlier this week, closed on Wednesday at a new low of $21.80 per share, down 13 per cent from its float price.

Some hedge fund of fund managers attributed the sharp rebound in equity markets late on Wednesday to hedge funds buying back stocks to cash in profits on their short positions and cover losses on longs.

Dixon Boardman, chief executive of Optima, said: "Hedge funds have been dialing back their risk in the face of difficult markets, but in my view the biggest risk of all now is the risk of not participating in the big snap back."