The asset-gathering business is heavily reliant on optimism. Most fund managers believe they have an investment process that delivers superior returns, in spite of overwhelming evidence to the contrary. Markets are nearly always forecast to rise, as are inflows. A survey last month by headhunter Sheffield Haworth revealed that most managers did not expect the credit crisis to affect their short-term hiring plans, nor their bonuses.

Optimism is one thing; denial is another. More than €100bn of net assets has been pulled from European funds since August, says Lipper Feri. Compared with a €346bn net inflow last year, the industry will be lucky if 2007 finishes in the black. In the US, retail investors are still being parted from their money, but 70 per cent of inflows in October went into money market funds. These typically earn US managers less than half the fees of domestic equity products, which are experiencing redemptions.

Of course, asset management is diverse – some parts will cope better than others when there is a heightened aversion to risk. Institutional business, such as managing pension funds, is likely to suffer changes in asset allocation, rather than outflows. High net worth individuals are also less likely to rush for the exits, and often view turmoil as a buying opportunity. Hedge funds have their own unique method of protecting money: they simply lock their investors in. Some products, such as high-margin structured funds offering capital protection, actually benefit from a few market jitters.

The troubles begin, however, when jitters turn to panic. Ultimately, asset managers are fixed-cost businesses. When equity markets plunge, new inflows are never enough to stop a drop in funds under management from hitting profitability. Staff cuts soon follow, as in 2002. Today the industry refuses to entertain a return to such conditions. But the sell-off in listed fund managers globally since November suggests that investors care less about today’s bumper profits, and more about the outlook for markets next year.

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