Wealthy Europeans, who were the first to invest in hedge funds and once comprised the majority of investors, have been the first to exit in the downturn, according to a study out today.

High net worth individuals last year accounted for 80 per cent – or more than $500 billion – of hedge fund redemptions, though they only held two-thirds of the assets. The outflows were disproportionately European, the study by the Bank of New York Mellon and Casey Quirk, a research firm, found.

“The result is not only a smaller industry, but a capital base that is more institutional and more North American,” the study said.

The outflows from hedge funds come after 2008 witnessed the worst year in performance for the hedge fund industry on record. On average, funds lost about 18 per cent last year, although that decline is less severe than the approximate 40 per cent drop in the value of developed economies’ stock market indices.

The shift leaves US pension funds as the hedge fund stalwarts: they are likely to account for the single largest source of new capital in the next four years. Pension funds put net new money into hedge funds last year and plan to put more in again this year, according to the study based on a survey of 158 investors and industry members.

Individual investors’ share of hedge fund assets has dropped from 67 per cent in 2005 to 57 per cent at the end of last year.

“Future flows from European high net worth investors are highly sensitive to future returns and represent the greatest source of volatility,” the study said.

“Asian high net worth investors also account for a very high redemption rate, in excess of 30 per cent, though the absolute outflow in dollars is smaller than those recorded in the larger European and North American high net worth markets. The widespread use of structured notes with automatic redemption triggers in the Asian and European markets drove these outflows,” it said.