NEW YORK (Bloomberg) — Fortitude Capital, an Australian hedge fund run by a former Citigroup Inc. trader, has been unable to arrest a slump in assets after redemptions from some investors who lost money with Bernard Madoff helped cut its managed funds in half.

Assets in Fortitude's flagship Absolute Return Trust, which has posted gains in all but three months since its inception in March 2005, have tumbled to around A$85 million ($74 million) from about A$180 million in October, founder and managing director John Corr said in an interview in Sydney yesterday. The Fortitude Equity Income Fund, which started last week, has raised A$5 million, about half its June capital target.

"It's frustrating," said Corr, 46. "We thought good returns would generate attention, and history shows that they are somewhat irrelevant, which makes you somewhat sceptical."

Overseas investors who allocate money to a range of hedge funds have bailed out even after Fortitude had positive returns during last year's record declines. About a quarter of the redemptions were related to cash pulled by firms who faced losses on investments with convicted fraudster Madoff, Corr said. Madoff ran the biggest Ponzi scheme in US history.

Damien Hatfield, principal at hedge-fund marketing and research firm Hatfield Advisors, said Fortitude's fund-raising troubles are not unique among Australian managers.

"The guys who have had fund-of-fund money have seen significant redemptions, and there are probably still pockets of unwind within the fund-of-fund area," Hatfield said. "You're caught between a rock and a hard place here in Australia. The big investors from offshore are prepared to go to Singapore and Hong Kong, but Australia is just one step too far, which is very disappointing."

Fortitude's market-neutral Absolute Return fund, which seeks steady profits by trading pricing gaps between securities, has also struggled to attract new inflows as investors seek to profit from the global stock market rally, Corr said.