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Spanish banking giant BBVA announced last week that it had decided to pull out of the hedge fund market, shutting domestic hedge fund manager Proxima Alfa Investments and also winding down Altitude and exiting BBVA Partners, two smaller alternative investment managers.

Spain's second-biggest bank by assets said it was closing the USD1bn business as a result of tough market conditions and in anticipation of the potential fallout from the financial crisis on the hedge fund industry. The decision affects around 100 employees and represents less than 1 per cent of the bank's USD165bn in assets under management.

Other mainstream financial institutions that have been hard hit by the financial turmoil are likely to follow this move. Morgan Stanley analyst Huw van Steenis says that he expects hedge funds to lose between 15 and 30 per cent of their assets in redemptions this year as US institutions join Europeans in quitting the asset class. At BBVA, most of the 2,000 or so clients invested in the 24 funds affected by the closure are reported to be institutions.

Many banks launched themselves into the hedge fund business as it boomed in recent years, but for many of them it is a non-core business that may well prove dispensable in the current environment.

This could easily have a cascading effect on hedge fund related-business, especially fund administrators. Inevitably, there will be some casualties amongst privately-owned administrators as they see asset levels shrink.

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