The size of hedge fund assets is expected to shrink by as much as 45 per cent from its June peak of almost $2 trillion as falling markets and client redemptions contract the size of this once booming sector,  predict analysts at Morgan Stanley.

The total assets of funds could fall to as low as $1.3 trillion next year before moving up to $1.6 trillion at the end of 2009, the Wall Street bank said in a short report on hedge fund trends.

The sector has endured one of its worst years for a decade in terms of performance. According to the Hedge Fund Research HFRX snapshot of returns, funds have lost 22 per cent between the start of January and 24 November.

Morgan Stanley expects European and Asian hedge funds to suffer heavier pullouts by investors than for US funds, at 25-30 per cent versus 15-20 per cent respectively. Redemptions of European and Asian funds will be partly higher due to easier liquidity terms, Morgan Stanley said.

“Clearly for fund managers the fact two of the biggest sources of high margin growth of the last five years – retail and alternatives – are in decline will hit profits hard, reinforced by operational gearing,” the Morgan Stanley note said.

As a result, listed fund managers will be hit hard, such as the UK’s Henderson and Schroders, as well as captive fund managers in banking groups, such as Pioneer, Société Genérale Asset Management and UBS Asset Management.