Bermuda-based investment funds lost $39 billion of their net asset value in the third quarter of last year, when world markets plunged.

The latest figures published by financial regulator the Bermuda Monetary Authority (BMA) showed the total value of funds based on the Island fell by more than 16 percent in the three months through September 30 to a total of $196.3 billion.

That is the first time the figure has dropped below $200 billion since 2006.

In its December 2008 Regulatory Update, the BMA said the drastic fall in the value of Bermuda funds reflected "adverse conditions and a general increase in redemptions in global financial markets". Fourth-quarter figures are likely to show another decline.

As markets plummeted in September, investors pulled their money out of funds at a furious rate. Worldwide, an estimated $225 billion flowed out of stock mutual funds in 2008, the first year of negative flow since $27.5 billion was pulled out in 2002, according to TrimTabs Investment Research.

Hedge funds also saw huge redemptions from their wealthy clients. In December alone, $150 billion was pulled out of hedge funds, bringing the total withdrawn in 2008 to around $200 billion.

Some funds have halted redemptions on the grounds that paying out large sums when the markets are at a low would cause severe damage to remaining investors.

The shrinkage of the funds industry over the past year was caused by a fall in the value of assets on top of the withdrawals.

The average hedge fund lost 21.7 per cent in 2008, according to Morningstar 1000 index. That is based on the 1,000 largest funds, which account for 90 percent of industry assets.

Bermuda-based funds will be among those that suffered further damage from Bernard Madoff's alleged $50 billion fraud. The Wall Street trader was arrested in December on suspicion of running a giant Ponzi scheme. Wire reports suggest that Kingate Global Management, which has some $2.8 billion in assets and is based on Front Street, was heavily exposed to Madoff, as was Fairfield Greenwich, which has substantial operations here.

The BMA report also found that the Island's banking system remained "highly capitalised and had strong liquidity" at the end of September.

Combined banks' deposits fell by $144 million during the third quarter to a total of $20.8 billion.

The reports found that the Bermuda dollar amount lent by the Island's banks and deposit companies was 122.7 percent of deposits held. This deficit increased compared from the second quarter, when the figure was 119.4 percent.

The BMA pointed out that the balance of Bermuda dollar loan demand is being primarily funded by the banks' US dollar deposits.

The report showed insurance company incorporations continued their gradual slowdown, with just three new companies setting up on the Island in the third quarter, compared to 15 in the same period a year earlier.