Hedge funds recorded their worst first-half performance in 18 years, as the credit crisis and the start of a bear market weighed on alternative investment fund gains, according to data compiled by Hedge Fund Research Inc., Bloomberg News reported Wednesday.

Hedge funds declined an average of 0.7% in June, which brought their first-half loss to 0.75%. It's the worst start for the sector since HFR began tracking hedge fund returns in 1990.

The Credit Suisse Tremont Hedge Fund Index is up a scant 0.52% for the year, and economist David H. Wang, who consulted for two hedge funds during 2002-2005, said the hedge fund sector is attempting to vault two formidable hurdles: a weeding-out of sub-par performers in the sector and the U.S. and global economic slowdowns.

"The hedge fund sector is in the midst of a competitive downsizing, and I don't doubt that lower-quality and lower-performance funds depressed the sector's performance for the first half of 2008. These funds will also weigh on the average in the second half of the year because the sector's rightsizing is likely to continue for at least another year, probably longer," Wang said. "Many hedge funds have also been hurt by the same economic factors that have hurt other investment funds and businesses, and the economy in general, and mortgage defaults and related asset-backed bond defaults are at the top of the list. Some models that thought that increased volatility would lead to higher net gains performed considerably below expectations when that volatility arrived."