However, they do not expect any losses this month to trigger a mass investor exodus from hedge funds, the investment vehicles which some see as risky because they can use derivatives, short sell and borrow or leverage to take bigger positions.
Expectations are that average losses will be between 2 and 3 percent, which would be the highest since March and April 2000 when the technology bubble burst and hedge funds were left nursing losses of 2.1 and 4.6 percent respectively, according to Credit Suisse First Boston Tremont Index.
Others backed that view.
"I think the range of outcomes you'll see is funds being anywhere from up 5 percent to down 10 or 15 percent for the month," said Bill Maldonado, chief executive of HSBC Alternative Investments.
"I think the average return will definitely be negative and it's going to be minus 2 to 3 percent, something like that."
Gartmore hedge fund managers Roger Guy and Guillaume Rambourg wrote to their investors last week warning that October would not be a good month, according to a report in the Financial Times. Gartmore confirmed to Reuters that a letter had been sent to investors but declined further comment.
At the start of October, many hedge funds who trade equities were expecting the bull run of previous months to continue and added to their investments with leverage.
Sentiment slipped further after US auto-parts maker Delphi filed for bankruptcy and news broke of an investigation into hidden debts at New York-based derivatives dealer Refco. However, industry players do not expect one month of losses to prompt investors to pull capital from the industry, since most do not look at individual monthly returns and performance in the 10 months to end-October will still be positive.
"October will just be a month of giving back gains from September," said Omar Kodmani, senior executive director at hedge fund firm Permal Group in London. "But that's not going to set the alarm bells ringing for investors."
Hedge funds returned an average of 1.6 percent in September, according to CSFB/Tremont.