According to figures from UK research firm Preqin, the average hedge fund reported a scanty 1.23 per cent gain in the first quarter, the lowest first quarter return since 2008 when markets were suffering the early symptoms of the financial crisis. The 2014 performance is well below the handsome 6.07 per cent return notched up in the first quarter of 2012, and the 3.76 per cent gain in the first three months of 2013.

The dismal first quarter return reflects the fact that many high-profile hedge funds were caught offguard by the turmoil in emerging markets, the decline in the US technology sector and the strength in the yen, which weighed on Japanese shares.

But the outlook for hedge funds could be about to get even worse, particularly if the US central bank pushes ahead with measures that will make it more difficult, and more expensive, for them to borrow large amounts of money.

On Tuesday night, US central bank boss Janet Yellen signalled that she was looking at ways to reduce the risk that the multi-trillion dollar short-term US credit markets - where money-market funds and institutional investors often provide funding to hedge funds – will seize up during future panics.

One option, she said in a pre-recorded speech played at a conference of the Federal Reserve Bank of Atlanta, was to force the non-banks that operate in these markets to hold a minimum amount of collateral, or margin, against the loans that they make.

Analysts said that this would reduce the risk that “shadow banks” would force borrowers to repay short-term loans during a panic. But it would also make it more difficult, and more expensive, for the giant hedge funds to build up highly leveraged market positions.

Although Yellen stopped short of declaring her commitment to such a move, she noted that regulators were actively considering extra measures to address short-term funding risks, including forcing big banks to hold more capital and introducing minimum margin requirements for short-term transactions that would "apply on a marketwide basis."

Yellen’s speech came in the same week that the San Francisco Federal Reserve published a study by visiting scholar Reint Gropp from Frankfurt’s Goethe University which found that “hedge funds may be the most important transmitters of shocks during crises, more important than commercial banks or investment banks”.

The study found that although spillover effects between financial institutions - commercial banks, insurance companies, investment banks and hedge funds - are small during normal times. But in times of crisis, “hedge funds have economically large spillovers to the other three types of institutions.”

The study argues that this is because hedge funds are opaque and highly leveraged.

“If highly leveraged hedge funds are forced to liquidate assets at fire-sale prices, these asset classes may sustain heavy losses. This can lead to further defaults or threaten systemically important institutions not only directly as counterparties or creditors, but also indirectly through asset price adjustments.”

According to the study, investment banks are the institutions most at risk from spillover effects from hedge funds during times of financial crisis. It calculates that during normal market conditions, a 1 percentage point increase in the risk of hedge funds increases the risk of investment banks by 0.09 percentage point. But during times of financial distress, the same shock increases the risk of the investment banking industry by 0.71 percentage point.

According to the study, “the largest impact appears to be on investment banks, which experience a spillover response around three-quarters the size of the initial shock to the hedge fund industry.”