Hedge funds worldwide have posted the steepest asset decline since 2008, according to the HFR Global Hedge Fund Industry Report.

Hedge fund capital fell $95 billion to $2.87 trillion during the third quarter, the largest drop since the 2008 financial crisis, according to Hedge Fund Research.

The quarter was one of global financial market volatility amid China's equity woes and uncertainty over the US Federal Reserve's anticipated rate hike.

The HFRI Fund Weighted Composite Index fell 3.9 per cent over the quarter, bringing HFRI performance to -1.5 per cent year-to-date through September. The HFRI has outperformed the S&P 500 Index by around 370 basis points and the Dow Jones Industrial Average by over 700 basis points, the widest margin since outperforming equities by 1800 basis points in 2008.

The industry generated a net inflow of $5.6 billion in the three-month period as new investor allocations of $47.9 billion were partially offset by redemptions of $42.3 billion. Event driven strategies logged sharp performance losses, led by declines in widely-held positions in Glencore and Valeant. Over the year to September, however, event driven strategies have been a favourable area for investors, attracting an estimated $11 billion of net inflows and bringing total event driven capital to $745 billion.

As volatility spread through emerging markets, equities, interest rates and commodities, macro strategy hedge funds suffered outflows of $5.1 billion in the third quarter, bringing year-to-date net outflows to $1.6 billion and decreasing total macro capital to $543 billion.

Equity hedge, the largest strategy area of hedge fund capital according to HFR, managing over $808 billion, dominated capital inflows year-to-date. The HFRI Equity Hedge Index, which has dipped 2.3 per cent from a year ago, fell a significant 5.9 per cent in the most recent quarter.

“Investors expanded allocations to small and mid-sized firms in 3Q, reversing a trend of steadily increasing the capital concentration into the industry’s largest firms, as financial market volatility increased and hedge funds outperformed equity markets,” stated HFR's president, Kenneth Heinz. 

“Recent market turmoil has resulted in increased risk aversion by investors but has also created opportunities for innovative approaches in key tactical and strategic areas. Funds of all sizes have already experienced a powerful performance recovery through mid-October, which is likely to drive industry capital gains into year end.”