Investors pull $152 billion out of hedge funds in fourth quarter

Alternative investing these days seems to mean finding an alternative to once red-hot hedge funds.

Institutional investors and well-heeled investors yanked a record $152 billion of their cash from hedge funds in the fourth quarter, and $155 billion for all of 2008, marking only the second year with net withdrawals since Hedge Fund Research began tracking the industry in 1990.

Total industry assets shrank to $1.4 trillion by year-end, from the mid-2008 peak of $1.9 trillion, the Chicago-based research firm said. The decline includes the effect of redemptions and the drop in the value of the funds’ investments.

Another fund tracker, Hennessee Group, said its preliminary data counted much larger net redemptions in 2008 -- nearly $400 billion.

In any case, the outgoing flow of money wasn’t surprising given the industry’s dismal performance. Hedge Fund Research’s primary hedge fund index skidded 18% last year, and other research firms estimate that the average fund lost more than 20%.

Although an 18% loss was far better than the 38% plunge in the Standard & Poor’s 500 stock index, many hedge fund investors may have been expecting their managers to protect them from any double-digit decline -- particularly given the steep fees the funds levy.

Some hedge fund investors were fleeing even before markets suffered their worst losses beginning in October. Those early redemptions helped fuel the markets’ fall meltdown because they forced managers to sell assets.

Even fund categories that notched positive returns in 2008 suffered net redemptions, according to Hedge Fund Research.

The heavy pace of cash withdrawals last year demonstrates how hedge funds have quickly fallen from their perch as a trusted financial preserve of the moneyed class.

Fears about the turmoil savaging the financial markets were magnified by the Bernard Madoff scandal, which broke in December and cast doubt on whether hedge fund screeners adequately scour the funds into which they pour clients’ money.

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walter.hamilton@latimes.com