Bill Ackman's Pershing Square, Jeff Ubben's ValueAct, and John Paulson's Paulson & Co have been hit hard this week because of their concentrated bets on Valeant, with Mr Ackman holding 30 per cent of his fund in the pharmaceutical company's shares.
Valeant shares fell a further 5 per cent on Tuesday, adding to a 16.5 per cent plunge on Monday, as investors took fright after Democrat politicians called for a subpoena to force the company to hand over documents relating to "massive price hikes" for its drugs.
One US-based investor in hedge funds said: "Large, focused bets on single companies can lead to huge returns for managers when they go well, but destroy years of gains when they go wrong. It is always a risky strategy no matter how much of an edge a hedge fund thinks it has".
According to US regulatory filings Mr Ackman held $US4.3 billion of Valeant stock at the end of June, implying the 39 per cent fall in Valeant shares since their August peak has cost his Pershing Square fund as much as $US1.6 billion.