Hedge fund assets fell 39%, to $1.21 trillion, in 2008, the worst year for the hedge fund industry, Hennessee Group LLC said.

The decline leaves the hedge fund industry's assets at their lowest level since 2006. Performance slumped in 2008 and outflows were a record-high $399 billion, after an 18% increase in inflows in 2007.

Hennessee, a hedge fund adviser based in New York, said Tuesday that fund of hedge funds are the largest source of capital for the hedge fund industry, at 32%. Assets for arbitrage and event-driven funds were down 43% last year.

"A number of high-profile funds liquidated or froze redemptions, which was a tactic historically employed by hedge funds with smaller capital bases," said Charles Gradante, Hennessee's co-founder.

The "largest Ponzi scheme in history" compounded the damage to hedge funds, Mr. Gradante said, referring to the case of Bernard Madoff, who was arrested last month.

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