Hedge fund managers around the world responded to last year's difficult market conditions by lowering their leverage and moving a significant share of their assets into cash.

According to a new study by Greenwich Associates and Global Custodian, the proportion of hedge fund managers earning double-digit investment returns dropped dramatically from 2006 to 2007, with the biggest falloff occurring among funds focused on fixed income. With industry-wide performance on the decline, the hedge funds participating in this year's study reported holding fully 15% of their assets in cash at the beginning of 2008.

Cash levels were slightly higher among hedge funds in Asia (17%) and Europe (16%). Equity-oriented funds had 14% of their assets in cash, and fixed income-focused funds had 17%. Among the world's biggest hedge funds, nearly 12% of assets were invested in cash.

Meanwhile, hedge fund industry leverage ratios declined to about 2.1 at the end of 2007 from 2.3 a year earlier, according to the study. Overall gross leverage ratios for fixed income-oriented funds declined to an average of approximately 3.0 at the end of 2007 from 3.4 last year.