More London-listed hedge funds are expected to wind up in coming months, following news this week that FRM Credit Alpha is to close.

Investment advisers now predict that a number of other funds whose share prices trade at a wide discount to their net asset value will become vulnerable to being wound up by shareholders seeking a return on their investment.

Wednesday’s announcement from FRM Credit Alpha is seen as continuing a trend that began in the aftermath of the Lehman Brothers collapse, and has already seen funds such as Gottex Market Neutral Trust, HSBC Global Absolute and MW Tops close down and return cash to investors.

“I don’t think that FRM Credit Alpha will be the last of the wind-ups,” says Mick Gilligan, head of research with the advisory firm Killik. “If a fund is trading at a 15 to 30 per cent discount, it’s in jeopardy of being wound up.”

But for investors, the downside of wind-ups is that they delay the payout of a return on the original investment. Typically, what happens in such a scenario is that a fund remains listed while its underlying assets are sold off. As a result, it can take three to five years for investors to recoup their money. “Some of these underlying assets are quite illiquid,” notes Gilligan. “So, a considerable period of time could pass before you get money back on the rump of a portfolio.”

Further consolidation in the listed hedge funds sector does not worry some experts, however.

James Burns, director with the advisory firm Smith Williamson, says that when a fund is trading at a steep discount, a significant return can be earned from the winding up and sale of its portfolio. He says: “Even if a fund is wound up, you can still potentially play an arbitrage game. If the fund’s asset value stays flat at its sale, you’ll make money.”

Burns remains bullish on listed hedge funds, in spite of their poor performance of late. “It’s not been an easy year for them, but you’ve got an opportunity at the minute to buy some experienced hedge fund managers at a wide discount,” he explains.

Even so, some private client wealth managers who got their fingers burnt with fund of hedge funds during the credit crisis are still waiting on the sidelines.

Simon Elliott, head of investment company research with Winterflood Securities, says: “The space has been a great disappointment to many of the people who backed fundraising launches in 2005 or 2006. People like the idea of absolute return funds offering low volatility. That’s not what they got.”

Others are steering clear of multi-manager funds and buying stakes in single-manager funds such as BlueCrest AllBlue, which remains popular and now trades at a 5 per cent premium to its net asset value. “These sorts of funds have been more successful and they have more control over whether they can liquidate their own funds,” says Gilligan.

BlueCrest AllBlue provides exposure to a range of hedge fund strategies, from mixed arbitrage and trade finance to emerging market macro and credit arbitrage.

Killik’s Gilligan also likes Third Point Offshore, which trades at a 14 per cent discount, and plans to invest more heavily in BlackRock Hedge UK Emerging Companies if its discount – now at 1 per cent – widens.

Listed fund of hedge funds are similar to open-ended absolute return funds in that they aim to make a return in all market conditions. However, many of the vehicles have failed to do so in recent years.

Most funds of hedge funds were launched before the credit crunch in 2006 and 2007, promising investors cash-plus returns. Of the $2,000bn (£1,323bn, €1,592bn) or so of investments made in the hedge fund industry at its peak in 2007, nearly half came via funds of funds. But the market downturn sent the share prices of many fund of hedge funds plummeting, as investors demanded their money back from the mainstream hedge funds in which the listed vehicles invested.