Stock-market listed funds of hedge funds were dealt a blow this week, as investors moved to sell their holdings in the aftermath of the Madoff scandal.

Private client wealth managers are reported to be shunning the asset class, as their compliance teams raise fears over the opacity of the investments.

Shares in hedge funds were sold off across the board this week, irrespective of whether they had exposure to Madoff funds.

Killik & Co, the advisers, said that the fallout from the Madoff debacle will cause investors to seek greater clarity and due diligence from funds. It thinks this will ultimately benefit single manager hedge funds but harm funds of hedge funds.

“I think the concept is broken,” said Nick Greenwood at Midas Capital. “For people who bought them for their low risk, low return clients, to see them approaching half their share price will be a shock.”

He predicts that there will be “very few” closed-ended funds of hedge funds left by the end of 2009. A few – including Close Man Hedge, F&C Event Drive and HSBC European Absolute – have already announced their intention to close.

Funds of hedge funds had already been suffering share price falls after investors put in redemption requests, and the hedge funds that they invested in were forced to deleverage.

A raft of funds of hedge funds and single manager funds were launched in the past few years to give retail investors exposure to the asset class.