The arrest of money manager Bernard Madoff is shaking up the way hedge fund indices are calculated, meaning returns from the beleaguered sector may be even worse than previously thought.

John Rekenthaler, vice-president of research at fund-tracker Morningstar, said it would this month write down the value of all Madoff-related funds to zero. However, it would not re-state its hedge fund index or remove the funds from it.