LONDON (Bloomberg) — Lloyd's of London insurers pulled as much as half a billion pounds ($825 million) from hedge funds and private equity after investment returns at the world's oldest insurance market fell by more than half.

Bermuda-based Catlin Group Ltd., Brit Insurance Holdings Plc, Chaucer Holdings Plc and Beazley Plc withdrew or have redemption requests on as much as £434 million of investments including in hedge funds, according to regulatory filings.

"The premise we and the rest of the world looked at in terms of hedge funds was that they would provide an uncorrelated return to things like the equity markets," Catlin's chief operating officer Paul Jardine said in a telephone interview. "That didn't happen."

The insurers were burned in 2008, when hedge funds posted their worst year, dropping 19 percent, according to data from Hedge Fund Research Inc. Aggregated accounts for Lloyd's underwriters show they posted 522 million pounds of investment returns last year, or two percent of assets, compared with 1.2 billion pounds in 2007. Hedge funds managed $1.4 trillion at the end of the second quarter, down from a peak of $1.9 trillion at the end of 2007, according to HedgeFund Research.

Chaucer recalled the £155 million it had in hedge funds in December, including assets overseen by Brevan Howard Asset Management LLP, Europe's largest hedge fund manager. The London-based insurer, which this year has fended off takeover approaches from fellow Lloyd's members Novae Group Plc and Brit, lost £71 million, or six percent, on investments last year, almost half of which was attributable to hedge funds.

Catlin has called for the return of $240 million of its hedge-fund investments. The company had 11 percent of assets in equities and hedge funds in first half of this year, according to regulatory filings.

The value of Brit's holdings in "specialised" investments fell by £116 million in the year through June. Brit had 7.4 percent of its assets in such investments in June 2008. Juliet Tilley, a London-based spokeswoman for Brit, declined to comment. Hedge-fund investments at Dublin-based Beazley dropped £18 million, or 18 percent, in the first half. All four insurers increased their cash holdings.

"I understand why they're disappointed," said Chris Manser, who oversees about $5 billion as head of fund of hedge funds for Axa Investment Managers Ltd. in London. "The value proposition of hedge funds for insurers is supposed to be steady returns and low volatility. Losing 25 percent is absolutely not in line with that."

Hedge funds failed to live up to the promise of being able to make money irrespective of underlying market conditions, Lloyd's said in its 2008 annual report. Bart Nash, a spokesman for the market in London, declined to comment, saying Lloyd's doesn't advise insurers on their investment strategy.

"A lot of investors decided in February that enough was enough," said Alex Allen, chief investment officer of Eddington Capital Management Ltd., a London-based company that oversees about $155 million of hedge-fund investments and had about a third of its assets pulled earlier this year. "Everyone buys at the top and sells at the bottom."

Hedge funds have rebounded this year, rising 14 percent through August, according to Chicago-based Hedge Fund Research. The FTSE 100 Index of leading UK companies added 11 percent in the same period. Hedge funds that survive have fewer competitors and more ways to make money, Axa's Manser said. "It all points towards a rich opportunity set with few people to split the pie," he said.