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Sketchy market conditions are belatedly taking a toll on jobs at hedge funds.

The hedge fund sector, which continued to attract new capital and create new jobs last year even while turbulent markets pushed some funds to the brink, is feeling the strain, the Financial Times reports.

"Hedge funds are beginning to close their doors or lay off teams of traders in response to the unprecedented gridlock in the debt markets which has led to losses and significantly reduced the amount of money banks are willing to lend their hedge fund clients," the article says.

The pullback of bank credit is making life tough for credit hedge funds and relative value funds that seek profit from small discrepancies among prices of similar securities. Such funds typically leverage up as much as 4-to-1 to juice returns on their own capital. Now most funds are fortunate if banks will lend them enough to go 2-to-1, the article says.

Recent casualties include a buyout-focused "event fund" run by Minnesota-based Deephaven Capital Management. Citing funds of funds managers, the FT also says Tisbury Capital is shutting down its U.S. operations.

But even as some hard-pressed fund groups shrink, top hedge fund managers continue to launch new operations. Tim Leslie is set to spin out Moore Capital's Moore Credit fund next quarter into an independent operation with $2.5 billion under management, according to a separate FT story. Leslie runs four top-performing hedge funds at Moore Capital that sidestepped last year's volatility. About 30 people based in London and New York will split off from Moore Capital to join the newly independent firm, James Caird Asset Management. Moore will retain a stake in the new firm. "The move reflects a growing trend in Europe towards the creation of second-generation hedge funds, with many of the biggest launches created by experienced hedge fund managers rather than investment bank proprietary desk traders," the FT says.

The average fund followed by Hedge Fund Research lost 1.8 percent in January. However, many individual hedge fund firms reportedly lost as much as 8 percent.

Marc Freed of Lyster Watson Investment Management, a hedge fund of funds firm, told the paper "it will be surprising if we don’t see a lot of hedge funds close down" at some point in 2008.