Hedge funds on Tuesday closed out one of their worst-ever quarters as US managers braced for an extension of the short-selling clampdown which has robbed them of one of their most popular strategies.

The hedge fund business has been left reeling by the combined forces of greater regulation – including the banning of short selling on certain financial stocks by the US Securities and Exchange Commission and other regulators across the world – the threat of investor withdrawals, a flight from risk and a squeeze on leverage.