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Government and regulators' attempts to deal with the financial crisis will lead to an increase in volatility in the short term, according to a fund of hedge funds manager.

Scot Kelly, director of Corazon Capital and manager of its Alternative Investment fund, cited stock markets' reactions to the US Congress rejecting the initial form of the £380bn financial rescue plan, as evidence of how fund managers should take interventions into account.

Following the vote last Monday the FTSE fell 145 points and the Dow Jones 777.7 points, although both rose later in the week when a second deal was passed.

Mr Kelly claimed that while action such as the bail out and the UK Treasury's nationalisation of aspects of Bradford & Bingley would "ultimately create stability" if handled properly, "short term volatility in equity markets rely on things such as whether Congress passes the bill".

He said: "It seems likely that the global financial position will be increasingly in the hands of politicians and regulators and this makes markets less predictable.

"We have to be on top of that type of information if we want to create stable returns for our investors. We have to manage the consequences of that."

The Corazon AIF Cayman is a 23 per cent long-short equities fund with the rest a mix of global macro and fixed income arbitrage, futures and a small amount of niche investments, including some technology.

It has been open to institutional investors only but this month launches to high net-worth retail buyers, with a minimum investment of £60,000.

However, Mr Kelly claimed the fund had been selling managers "who are aggressive on the long side", as well as reducing financials in the short book.

And he said the FSA's temporary ban on short selling "proves we are doing the right thing broadening out our short exposure".

He said: "At the moment we are positioning the fund in a very conservative manner. I would anticipate in the next six to 12 months we will preserve capital, then gradually become less cautious and start seeing opportunities.

"After that sort of time we would eventually then be looking at things such as insurance-based funds and asset-backed lending - investments that will create more returns. We will be net long but adding in some more short biased managers."