More contraction for hedge funds appears to be more or less permanent.

The Shrinking Hedge Fund Industry: From $2 Trillion to $1 Trillion By 2009?

Between 1990 and last year the industry’s assets under management grew almost 50-fold, to nearly $2 trillion. Now industry executives predict that assets could fall by 30-40%, as clients stampede for the exit. The number of funds, which climbed to over 7,000 as a generation of financiers headed for the gold-paved streets of Mayfair in London and Greenwich, Connecticut, could fall by half. Nov 20 Hedge Fund Research (via FinWeek): Hedge fund assets worldwide shrank by 9 percent to $1.56 trillion in October, the lowest level in two years, after investors withdrew cash and stock markets declined.

# Investors pulled $40 billion from hedge funds in October, according to Chicago-based Hedge Fund Research Inc., while market losses cut industry values by $115 billion. Investors withdrew $22 billion from funds of funds, which pool money to invest in hedge funds.

# About 350 hedge funds shut down in the first half of 2008, up 16 percent from 303 a year earlier, according to data compiled by Chicago-based Hedge Fund Research Inc.

# Hedge funds fell by an average 6 percent last month, pushing the year-to-date decline through October to 16 percent (S&P decreased 17 percent last month, and 34 percent this year through October.)

# Levkovich (Citigroup): “‘It is possible hedge fund assets will drop 40%-50% from their peak by mid-09’ given 20%-like losses in existing funds this year, and another 20% of redemptions.

# On the positive side, the industry’s estimated 40% cash positions should accommodate a smooth deleveraging

# Also wouldn’t rule out a late-year hedge fund driven rally, as most likely will try to participate to limit annual losses beyond which, a humbler, smaller industry should evolve, with longer investment time horizons.