GENEVA (Bloomberg) — Hedge funds were unprepared and damaged by this year's collapse of the subprime credit market, according to an industry survey.

About 44 percent of those asked at the GAIMInvest conference today in Geneva said hedge funds were "damaged" as record home defaults in the US triggered declines in world-wide credit and equity markets. About 39 percent said hedge funds were "strengthened," while 17 percent said they were unchanged.

Hedge funds should have been better prepared for the market drop, said Philip Anker, managing director of alternative investments at Citigroup Inc. "A lot of clients were disappointed in August at how much correlation was going on," he said. "It highlights that maybe there's not as much hedging going on as people think. We should all take this as a wake-up call."

Hedge funds are mostly private pools of capital whose managers participate substantially in profits from their speculation on whether the price of assets will rise or fall.

Man Group Plc chief executive officer Peter Clarke told conference participants that "scandal" is the biggest threat to hedge fund industry expansion.

"Scandal is the surest way of breaking trust," said Clarke, who helps oversee $70 billion at London-based Man, the world's biggest publicly traded hedge fund company. Participants in the group's survey cited regulation and lack of investor understanding as the main constraints for hedge funds.

Clarke said the industry now recovers more quickly from blowups than it did in 1998, when Long Term Capital Management LP collapsed with $4 billion of losses, or in 2006, when Amaranth Advisors LLC was wiped out by $6.6 billion of wrong-way bets on natural gas.

"The half life is getting shorter," said Clarke. "The magnitude of risk from a single manager is decreasing."

The hedge fund industry as a whole suffers when high profile funds go bust, Anker said. "Institutional investors are not paid to be heroes and take those risks," Anker said. Citigroup managed about $49.2 billion of alternative assets at the end of 2006.

Investors "have to do more work" picking managers and strategies to understand "what's under the hood," Clarke said.