Troubles mounted for some of the world's biggest hedge funds on Thursday as Highland Capital Management told investors it was shutting down two of its funds and details emerged of big losses at TPG-Axon.

The problems in the sector have set in motion a vicious cycle in the markets as hedge funds sell holdings to return money to worried investors, triggering further price declines and prompting more withdrawals. Investors pulled at least $43bn (€bn, £bn) from hedge funds in September, according to TrimTabs Investment Research.

"Unfortunately, selling has begat selling as risk reduction and unwinding create spillover pressure on other funds with overlapping holdings," Dinakar Singh, the founder of TPG-Axon said in a letter to investors at the end of September.

TPG-Axon - an affiliate of private equity firm TPG that had $16bn under management at its peak - told investors it was down 26 per cent through September of this year.

"The last quarter has been abysmal," Mr Singh said. "We clearly underestimated the potential damage to us from chaotic moves elsewhere."

Ken Griffin, founder of Citadel Investment Group, told investors in a letter that September was the worst month in its history and to expect more volatility.

Citadel, which has $18bn under management, estimated that its Kensington and Wellington funds were down 26-30 per cent during the first week of October.

Highland, one of the largest investors in the debt of companies owned by private equity, said it was closing two funds with $1.5bn in net asset value. Letters sent to investors in the funds say they plan to sell 40 per cent of their assets, mostly bank loans, in the next 12 months.

At the end of June, Highland, which is known for its aggressive tactics in dealing with corporate borrowers, had about $38bn in assets in debt funds. It continues to control three other hedge funds.

This week, Highland began trying to sell a portfolio of loans with a nominal value of $640m. Because Highland is such a big player in the market for loans and bonds of companies with high debt loans, its difficulties could send prices in such markets lower, putting pressure on other players.

"There are no assurances that the wind-down process will have a positive effect on the value of the portfolio or that further losses will be avoided," the Highland letters said.