Robert Graham-Smith, portfolio manager with Select, said that some prime brokers were forcing hedge funds to delever and sell assets.

"They are under massive pressure to take risk off the table before year’s end," he said.

"It is compounding an already difficult year for hedge funds."

Select also holds exposure to the Gottex market-neutral hedge FoF through the Select Alternatives Portfolio, which allocates between 20 and 22 per cent to the fund, and the Growth and Defensive portfolios, which both allocate between 8 and 10 per cent to the fund.

Graham-Smith said the boutique was compensating for Gottex’s limited currency hedge by drawing on cash reserves to build an overlay from currency forward positions. But a similar overlay could not be applied to the Select Gottex Market Neutral Fund since the boutique could not access cash flows within the underlying vehicle.

Tim Murphy, an analyst with Morningstar, said the researcher was speaking with $A-denominated hedge funds to determine their ability to maintain currency hedges – Warakirri’s international hedge fund-of-funds, which is sub-advised by Mesirow, was forced to go unhedged for two weeks recently.

“It hasn’t tipped anyone over yet,” Murphy said.

Meanwhile, in September, Gottex wrote off 2.5 per cent in performance due to the exposure of its market neutral hedge fund-of-funds to underlying funds with investments in Petters Company, whose chairman and chief executive officer, in addition to several associates, are facing allegations of scheming to defraud investors of at least $US 100 million.

In October, Gottex stated that its exposure to Petters was less than 4 per cent of its US$15.6 billion under management. Shares in Gottex lost 75 per cent of their market value in the weeks after news of the Petters case emerged.