In October, according to Chicago-based tracking firm Hedge Fund Research, investors withdrew a record $40 billion in assets from hedge funds as the global amount managed shrank by 9% to an estimated $1.56 trillion, their lowest level since December 2006.

Other market players are forecasting that markets could remain stagnant or just trade sideways for as much as 15 years. Hugh Hendry, partner and chief investment officer at Eclectica Asset Management, believes that poor performance by both hedge funds and private equity could leave both industries as niche, overlooked sectors in future.

In addition, many hedge funds and funds of funds are still suffering from the Lehman Brothers collapse, as they cannot access shares and loans still held at the bank. This has resulted in funds closing or blocking withdrawals because they cannot access their holdings. These are not in danger but have been frozen by Lehman’s administrators. Some funds have claimed they will have to close within a month if they cannot access their assets.

Last week, the US Securities and Exchange Commission (SEC) announced that global securities regulators were to launch three task forces to study abusive short selling, unregulated financial products and unregulated financial entities such as hedge funds. All three areas will impact heavily on the practices of funds and, coupled with public pressure to find someone to blame, are bound to result to further restrictions on the funds.

In response to their crisis, investment consultant Watson Wyatt has reported that global hedge funds have become much more flexible in offering lower fees to institutional investors despite diminishing returns and assets under management. However, according to Hedgeworld News, other funds are trying to slow the outflow of cash by imposing conditions on investors withdrawing their assets.