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The total estimated assets managed by hedge funds, excluding double counting of assets in funds of funds, decreased by 23.2% in Q4 2008 to $1.932 trillion The decline resulted in total assets falling 32.5% in 2008 compared to an increase of 32.9% in 2007. The hedge fund industry assets declined to levels not seen since Q3 2006. Performance losses reduced assets an estimated 6.9%, or $173.1 billion and the total reduction in assets from Q3 of $599.9 billion is the largest dollar value change, up or down, on record for the industry. The prior record quarterly asset reduction was Q3 2008.

There are several broad trends worth noting.
(Net redemptions are the amount by which redemptions exceed allocations and net liquidations are the amount by which liquidations exceed new fund launches)

• Investor redemptions accounted for an outflow of $420.2 billion during Q4 2008. In 2008 redemptions were greater than new allocations by $446.6 billion. Liquidations were an estimated $6.5 billion greater than new fund launches. For the full year, liquidations outpaced new fund launches by an estimated $20.5 billion.

• The fund of funds industry continued to undergo a contraction in Q4. During the quarter FoFs experienced $133.6 billion in performance losses, reducing assets 11.4% from Q3, $157.1 billion in net redemptions and $14.7 billion in net liquidations. Q4 was the first quarter on record when FoF liquidations outpaced HF liquidations by dollar value. For the full year 2008, total FoFs assets dropped 34.3%, an estimated $477.3 billion to $912.6 billion.

• Beginning Q3 2008 “Offshore” funds, those domiciled outside of the U.S., saw asset reductions at a far faster rate than “Onshore” funds. Total assets in “Offshore” domiciled funds decreased by 25.7% during Q4 2008 compared to a decline of 16.3% for “Onshore” funds. In Q4 alone “Offshore” fund assets fell 7.0% due to performance, 18.4% due to net redemptions and 0.3% due to net liquidations. Funds located in Europe saw the biggest declines due to investor redemptions while funds in Asia saw the highest rate of liquidations. European based hedge funds had assets reduced by $151.3 billion in Q4 due to net redemptions and Asian based fund assets fell 11.0% from net liquidations. Total assets fell 25.6% and 28.4% in Europe and Asia, respectively.

The following are broad regional trends worth noting:
• In terms of YTD asset outflows, funds with a mandate to invest globally have experienced the lowest levels of declines while those investing in Europe, both developed and emerging, saw asset levels fall significantly. Total assets invested in Europe declined an estimated 58.9%, or $209.1 billion, to an estimated $170.2 billion. Funds investing in Emerging Europe saw asset declines of 69.9%. Performance in funds inveting in Russia and the remainder of Eastern Europe accounted for an asset decline of 58.3% while redemptions and liquidations accounted for an additional 11.7% drop.

• Funds with specific country or regional mandates fared much worse than those with a global mandate. Large losses and redemptions were not limited to emerging markets either. In Q4, funds which invest primarily in U.S. markets lost $90.6 billion from net redemptions, 15.1% of assets, $78.7 billion from performance, 11.7% of assets and $7.12 billion in liquidations. For all of 2008, funds investing in U.S. markets experienced asset reductions of 38.8% to $475.3 billion.

• Total estimated assets in funds investing in Asian markets fell 50.0% in 2008 to $83.3 billion. Redemptions accounted for a 23.9% decline throughout the year, however the majority of this outflow was in Q4 when an estimated $30.3 billion more was redeemed than allocated. Assets in funds investing solely in Japanese markets continued to slide in Q4, falling 26.7%. For the year these funds’ assets fell 56.4% to an estimated $12.0 billion, the lowest level since HFN began recording asset flows in Q4 2003.

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