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Hedge funds wither under $152B in withdrawals

Date: Wednesday, February 4, 2009
Author: George White, The Deal.com

Hedge funds have seen the best of times and the worst of times in the fourth quarter. In the last quarter of 2007, the industry attracted a record $194 billion from investors. But it's been all downhill from there as the financial crisis handed hedge funds their worst returns in nearly 20 years, according to Hedge Fund Research, prompting a crippling $152 billion in withdrawals in the fourth-quarter 2008.

With hedge funds posting losses of 18.3% last year, investors fled the industry as 2008 came to a close, using the fourth-quarter window -- usually the only time hedge funds allow withdrawals -- to make their exit. Many funds require a three-month notice from investors who want to exit by year's end, setting a deadline of Sept. 30 -- known in the industry as "D-Day."

Since then the situation has only worsened as numerous funds -- including Bernard Madoff's -- have been exposed to Ponzi schemes at the same time that equity and debt markets have wilted. Industry stalwarts like George Soros have predicted that the fallout from the recession and investors' aversion to risk will crush the industry. In November, Soros told Congress that "the bubble has now burst, and hedge funds will be decimated. I would guess that the amount of money they manage will shrink by between 50% and 75%."

Total assets under management for the industry fell to $1.4 trillion at the end of 2008, a decline of $525 billion from the peak of $1.93 trillion at mid-year 2008. - George White