Last month's sharp rise in volatility did not work in hedge funds' favor, new research showed, as the industry posted its sixth month of negative returns for the year.
Fund data provider Eurekahedge found that investors pulled some $1.6 billion from strategies in October.
Fears of global growth and deflation concerns drove the S&P 500 into correction territory last month, but markets made a sharp recovery in the latter half of October after a slew of positive data and corporate earnings results.
Hedge funds were down 0.24 percent last month, underperforming the MSCI World equity index which finished up over 1 percent, the research showed.
Event-driven funds, including strategies run by the likes of billionaire John Paulson, suffered significant losses, with merger arbitrage funds among the worst performers, Eurekahedge said.
This came as a number of high profile mergers fell through, including Abbvie's offer for rival Shire, resulting in losses for managers who had made heavy bets on these companies.
Paulson's fund, which was backing the merger, plunged 14 percent in October according to the fund's latest statistics.
Increasingly risk adverse
Ahead of October's volatility, investors appeared to be growing increasingly risk adverse, as redemptions hit $5.1 billion in September, separate data from BarclayHedge and TrimTabs Investment Research showed on Tuesday. This marked the largest monthly outflow since December 2013.
"Hedge fund inflows slowed sharply in the third quarter," said Sol Waksman, president and founder of BarclayHedge, in a statement.
"The industry raked in $82.1 billion in the first half of 2014 — more than in the previous three years combined — but inflows subsided to $12.6 billion in the third quarter," he added.
Hedge funds lost 1.3 percent in September, the worst return in 15 months, but outperformed the S&P 500, which lost 1.4 percent. Over the past year, the industry returned 10.3 percent, while the S&P 500 gained 19.7 percent, according to figures from TrimTabs and BarclayHedge.