Record Redemptions, Poor Performance Sap Hedge Fund Assets

Jan 21 2009 | 4:24pm ET

Two years’ worth of growth in the hedge fund industry was obliterated last year as investors fled, saddling the already hard-hit asset class with the biggest outflow in history.

Hedge funds managed just $1.4 trillion on New Years Day, a 27% decline from the middle of last year, when the industry peaked at $1.93 trillion, Hedge Fund Research reports. Of the vanished $525 billion, record investor redemptions in the fourth quarter were responsible for $152 billion of the lost assets. All told, 2008 outflows totaled $155 billion, only the second time ever that the hedge fund industry has contracted since at least 1990.

“Investor risk aversion remained at historically extreme levels through year-end, even as implied and realized asset volatility moderated,” Kenneth Heinz, president of HFR, said.

The top 10% of hedge funds in the HFRI index returned an average of 40% last year, while the bottom 10% lost an average of 62%. But investors did not discriminate in running for the exits. Macro funds were one of the few to enjoy a relatively strong year, but investors still pulled $31 billion from the strategy. Short-biased funds and systematic diversified strategies posted double-digit returns, but still investors took their money and went home.

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