By Svea Herbst-Bayliss

BOSTON (Reuters) - Hedge funds, known for their big bets, fees and pay packages, are on track to shrink this year as disappointing returns have forced an increasing number to shut down, Barclays said in a report released on Monday.

The industry is expected to contract for the first time since the 2008 financial crisis as fewer funds are likely to be launched and more managers call it quits, the report said.

Barclays estimated 2016 would end with 340 fewer hedge funds worldwide, down about 4 percent from last year. The last time the number shrank was in 2009, by 4 percent, following an 11 percent contraction at the height of the financial crisis.

Research firm Hedge Fund Research (HFR), in a monthly report released on Friday, counted a total of 10,007 hedge funds worldwide in July.

"Based on recent HF (hedge fund) performance and the increased challenges to launching an HF (hedge fund), we estimate that there would be a net decrease in the number of funds by YE (year end) 2016," the Barclays report said.

Barclays' calculations were based on a survey this year of 340 investors who had allocated $900 billion to hedge funds, making up roughly 30 percent of the industry.

From 2010 to 2015, the number of funds grew 2 to 3 percent each year. But Barclays found that 61 percent of those surveyed felt hedge funds did not meet their expectations.

Investors overwhelmingly blamed the industry's large size for current tepid returns, with 74 percent of those surveyed saying too many managers were chasing a limited number of ideas.

Losses have led to a drop in assets at some funds, leaving managers few options but to shut down.

Laurion Capital Management, launched in 2012, has closed its $1.1 billion Laurion Capital Global Markets fund, sources said in July.

Fortress Investment Group said last month that it planned to shut its Centaurus Global hedge funds.

But some big names are still venturing into the field. Two former Soros Fund Management executives said earlier this year they would launch a firm called Castle Hook. Taconic Capital Advisors co-founder Ken Brody said in August he would come out of retirement to launch Sutton Square Partners.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Chang)