Hedge funds reduced their gearing last year by about 10 per cent, according to a private survey by British regulators, lowering the potential for the failure of a major firm to create a domino effect across the financial system.

The survey by the Financial Services Authority of prime brokers, the main lenders to hedge funds, found gearing dropped from 1.86 times net equity in April to 1.66 times in October, said people briefed on the results.