NEW YORK (Bloomberg) — Hedge funds worldwide shrank by nine percent to $1.56 trillion last month, the lowest level in two years, after investors withdrew cash and stock markets declined.

Investors pulled $40 billion from hedge funds in October, according to Chicago-based Hedge Fund Research Inc., while market losses cut industry values by $115 billion. Investors withdrew $22 billion from funds of funds, which pool money to invest in hedge funds. Hedge funds fell by an average six percent last month, pushing the year-to-date decline through October to 16 percent, according to the HFRI Fund Weighted Composite Index, which HFRI first published in 1990. In the same periods, the hedge-fund index outperformed the S&P 500 Stock Index, which decreased 17 percent last month, and 34 percent this year through October. Funds run by Jeffrey Gendell and John Burbank III posted their worst monthly losses in October. Peter Thiel gave back gains made earlier in the year. Nobel-prize winner Myron Scholes froze his biggest fund.

Gendell's Tontine Capital Partners LP fund, based in Greenwich, Connecticut, plunged 65.7 percent in October, extending its decline for the year to 76.8 percent, according to investors. Burbank's Global Strategy fund fell 38 percent in the month and 44 percent year-to-date, according to a letter to clients of his San Francisco-based based Passport Capital Management LLC.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.