The Incredibly Shrinking Hedge Fund Industry

Recent weeks for hedge-fund managers have been ug-lee.

And, as companies that track the industry scramble to put out estimates quantifying the value of the damage there is no consensus on just how much hedge funds have lost, but the trend is crystal clear.

Some of the latest come from Eurekahedge, a hedge-fund research company and consultancy. According to its preliminary estimates, hedge-fund losses totaled roughly $79 billion in September, including $44.5 billion of investment losses and $34.5 billion of investor withdrawals. That was only partially offset by about $10.5 billion of new money flowing into the more successful strategies, Eurekahedge figures.

The financial turmoil has caused steep declines across a number of markets, triggering widespread losses across the hedge-fund industry. Many hedge funds now are down as much as 30% or more for the year–and some 60% or worse. Even many of the biggest names in the hedge fund industry have suffered hefty declines, including Ken Griffin’s Citadel Investment Group and Tim Barakett’s Atticus Capital.

That is causing already skittish investors to take out money and park it in less risky places, such as cash. And, some of the industry’s largest investors–the fund-of-fund groups that invest in pools of hedge funds–have had hefty withdrawals from their own investors, forcing them to take out more money from hedge-fund managers.

In the third quarter, hedge-fund assets shrank by a record $210 billion, or more than 10%, estimates Hedge Fund Research. To put that in perspective, the decline in assets for the quarter exceeded the entire amount of money that flowed into the industry in 2007, which was a record $194 billion.

Of those third-quarter declines, more than $31 billion was attributed to investors taking out their money, the largest net capital redemptions on record, says Hedge Fund Research. That left total hedge-fund assets at $1.72 trillion, down from $1.93 trillion at the end of the second quarter.

As a group, they were down almost 5.5% in September alone and down more than 10% for the year so far, according to Hedge Fund Research. To be sure, that is still better performance than the broader stock market.

And, the contraction is expected to continue, with many industry insiders predicting that by year end hedge-fund assets will have shrunk by a quarter or more. Already a number of hedge funds have shut their doors and many more are expected to follow suit. Credit Suisse estimates 30% of the roughly 8,000 hedge funds will close in the next few years.