Hedge fund managers were today hauled in front MPs to answer questions about millions earned short selling banks’ stocks.

The Treasury select committee quizzed representatives of the hedge fund industry on their role in falling bank stocks after the Financial Times reported Paulson & Co made a profit of £270 million betting on a fall in the Royal Bank of Scotland share price over the past four months.

Treasury committee chairman John McFall said: “You are making shed loads of money.”

Paul Marshall, at hedge fund Marshall Wace, hit out at the figures quoted – explaining the hedge fund industry as a whole has lost 18 per cent over the last year.

“The industry is not making vast profits. Blaming hedge funds is like blaming passengers on bus crash.

“Hedge funds are suffering and these [profit] figures are taken out of context.”

Stephen Zimmerman, at NewSmith Capital Partners, said hedge fund were not responsible to pushing down bank share prices.

“There has been a huge destruction in wealth [from falling bank share prices], but do no think this is down to short selling in shares.”

Douglas Shaw, from hedge fund giant Black Rock, managing over £1 trillion of assets in and out of hedge funds, said: “Some hedge funds have made profits from decline in bank share prices – but unfair to say they made money out of misfortune of others.

“Just because share price did fall, not that hedge funds made them fall.”

Mr Shaw also pointed out some of the biggest buyers into Northern Rock during its crisis were hedge funds.

“Our job is to serve our clients,” he said.

He added assets under management at hedge funds had fallen from £2 trillion to £1.3 trillion now, and the number of hedge funds in the last year had reduced – as clients have moved cash away from funds as their finances have been squeezed.

Andrew Baker, of the Alternative Investment Managers Association (AIMA), said between 30 and 40 per cent of hedge funds had now imposed gates – stopping investors taking cash out of the investments.

“If there was a flock of redemptions, no financial institution could survive. Holding on to investors’ money is absolutely last resort that no one wants to do.”

He added a number of hedge funds had not imposed gates because of the dangers it presents to a business.

The hedge fund representatives also denied – but failed to rule out – that a Madoff-like scandal could occur in the UK given the amount of legislation.

Mr Marshall added the amount of leverage used by hedge funds – borrowing to invest – was diminishing and, in a “Darwinian” industry, those relying on leverage would not survive.

Mr McFall added: “Apart from making money for people, what do you do?”

Mr Baker said: “We employ about 40,000 people, apart from benefits to market places… the main benefit is to investors.

Mr Marshall said:” We are part of the savings industry – and we will do well or badly depending on if we deliver.”