Hedge Funds Hit With Record Redemptions

Investors withdrew a record amount of capital from hedge funds in the fourth quarter as the industry concluded its worst-ever annual performance, according to data from a research group.

With performance down and volatility on the rise, investors pulled $152 billion in capital from hedge funds during the last quarter of the year, Hedge Fund Research said Wednesday. Investor redemptions were indiscriminate across fund strategies, regions, asset sizes and performance dynamics, the firm said. Capital outflows were concentrated in September and October, as the cumulative decline approached 13%.

For all of 2008, hedge funds saw a record $155 billion in withdrawals, only the second time in which the industry experienced a net outflow of investor capital over a full year period since Hedge Fund Research began tracking asset flows in 1990. Year-end assets totaled $1.4 trillion, down $525 billion from the midyear peak of $1.93 trillion, the firm said.

Hedge funds have long been touted as a way for wealthy individuals to reap big returns, thanks to riskier investment strategies. However, tough market conditions that persisted last year sent the industry reeling, with negative returns prompting clients to demand their cash back.

Prominent hedge-fund companies like Fortress Investment Group (FIG Quote) have placed restrictions on redemptions. Others, including Blackstone (BX Quote), Och-Ziff Capital Management (OZM Quote), Cerberus and Citadel are facing tougher times, as well.

Risk-weary investors made no distinction among the top and bottom performing funds in 2008. Hedge Fund Research's composite index fell by 18.3% in 2008, only the second calendar year decline since 1990, essentially wiping out two years of record growth as industry assets returned to 2006 levels.