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The fund of hedge fund industry has been hit, along with much of the financial services sector, by bank failures, deleveraging and recession over the last year, according to Morten Spenner, chief executive at IAM.

Illiquid securities in a falling market, coupled with an "unwarranted sense of optimism" by managers about the safety of their business, have proven a challenge for fund of hedge funds, Mr Spenner said.

"The degree to which people have misunderstood the industry has been an additional challenge for hedge funds to overcome," he said.

"Reactions have been emotional rather than analytical."

He said the hedge fund industry served as the "perfect scapegoat", as it has no unified voice, despite attempts of industry bodies like Aima.

"The value of a true partnership between manager and investor, as well as transparency, will be of utmost importance for the hedge fund industry in 2009."

He added that there should be personalised investment portfolios that give investors more decision-making powers.

Spenner also criticised the hedge fund industry for its conduct over the year.

"Greater transparency is needed in the hedge fund industry," he said.

"There has been a lot of greed and naivety over the past year, with the industry growing in a manner not dissimilar to that of the sub-prime mortgage market."

Spenner aimed to quash criticism of the industry for shorting stocks during the collapse of the global banking sector this autumn.

He also expressed the need for governments to lift the shorting ban imposed earlier this year.

"The shorting ban has always been a short-term measure in exceptional circumstances, and we have confidence in the US and UK regulators to recognise this fact," Spenner said.

For more on this read next Monday's edition of Investment Adviser.