The head of the Man Group, Peter Clarke, said overnight that one in 10 hedge funds around the world could fail. Naturally as the largest manager of hedge funds, he was exempting his own stable, but he is in a position to know something about the health of this still edgy form of investment.

Clarke told the Financial Times that the knock-on effect of the crisis in credit markets was also making it harder for hedge fund start-ups, with a drop of close to one-third in new fund launches.

And the FT‘s respected Lex column wrote this a few hours ago:

Unsurprisingly, worries about housing-related losses continue to hammer financial stocks. But the fear is spreading. There are already rising credit losses in other financial products and signs of more cautious lending from banks. No wonder the S&P 500 on Wednesday briefly gave up its gains for the year and the yield on the 10-year Treasury bond dipped below 4 per cent. Investors are increasingly factoring in a serious hit to the US economy, particularly the long-resilient consumer. Sentiment will hardly have been helped by the Federal Reserve’s latest economic projections which suggest it believes that long-term growth potential for the US has slowed to 2.5 per cent from, say, 3 per cent.

Given the continuing credit market dislocation, the Fed looks unlikely to hold its line against further rate cuts. The weak dollar should expect no immediate respite.

That said, if problems mount in the US, the rest of the world will not be immune. There are already signs of stress on European banks, causing broader credit conditions to tighten. Perhaps the best hope for a rally by the dollar against the euro would be clearer signs that American weakness is spreading across the Atlantic. That could well be on the way.

The phrase “risk aversion” no longer adequately covers the growing level of tension and concern on world markets.