The law firm representing investors in the collapsed Bayou hedge fund is focusing on third-party liability as it becomes increasingly clear the investors have lost at least half of their money.

Bayou, whose principals have gone to ground after failing to return investors' money in mid-August as promised, had been masking heavy losses by faking its returns from as early as 1998, according to lawyers and regulators investigating the fund. The US attorney's office last week filed a court claim to seize the group's assets, including $101m held by Arizona authorities.