Yesterday afternoon BBVA announced the shut down of all its alternative management activities. BBVA, Spain's second largest bank, had assets under alternative management represent less than 1% of its €130 billions run worldwide.

The bank is planning an orderly withdrawal and full redemption of assets of the funds run by its two hedge fund subsidiaries Próxima Alpha and Altitude. Altitude has €125 million spread across various funds while Próxima Alfa Investments has assets of €930 million.

BBVA alternative investments are mostly aimed at institutional investors and the bank stressed the decision has been taken in spite of the fact that its funds ‘were in positive territory on average’.

BBVA was the hedge fund pioneer in Spain, having opened the country's first hedge fund in November 2006 - the BBVA Codespa Microfinanzas fund. At that time, providers had high hopes for the sector in the wake of legislation enabling mainstream investment firms to operate in this area.

The decision the country's leader alternatives manager to pull out of the business shows just what bad shape the hedge fund industry is in.

At the end of January, Santander closed seven hedge funds run by its subsidiary Optimal while last year Barclays, Bankinter, Nmas1 and UBS terminated their hedge funds business in Spain. At the end of 2008 less than €1.3 billion was invested in hedge funds.

As Citywire reported, the story of the nascent Spanish hedge fund industry starts as in November 2006 when the financial authority CNMV passed a new regulation that allowed fund of funds registered for sale in Spain to invest a maximum 10% in hedge funds.

In the excitement which followed, about a dozen of local and international companies quickly launched fund of hedge funds to take advantage of the new regulation. However many funds have since been forced into liquidation due to redemption requests from clients during the last months.