Assets held in hedge funds increased in 2009, but it was a small victory in the grand scheme of things for an industry that is losing top talent and had more funds continue to liquidate last year.

Claude Schwab, a partner at Heidrick & Struggles International and head of its U.S. hedge fund practice, said more than 20% of hedge funds shut down in the past two years, as 1,500 funds were liquidated in 2008 and 900 more in 2009. Schwab hedge fund managers with less than $1 billion in assets under management remain “especially vulnerable.”

“This vulnerability will have a direct impact on talent flow in 2010; top talent seeks high-quality, stable firms,” Schwab said.

According to a quarterly report by Heidrick & Struggles, a New York-based executive search firm, that was issued Wednesday the hedge fund industry surged past $2 trillion in total assets under management in November. Schwab said growth was largely due to performance rather than net inflows.

“It has been a tremendous turnaround year for hedge fund survivors, marking their best returns in over 10 years," he said. "But this has been a Pyrrhic victory for the industry as a whole.”

Heidrick & Struggles, which surveyed more than 400 portfolio managers and studied more than 100 hedge fund firms for its quarterly report, said that the availability of top talent is decreasing as hedge fund professionals move to other hedge funds, proprietary trading banks, asset managers, and a host of other destinations including endowments, foundations, and family offices.

The company said that veteran hedge fund professionals are also in demand at the regulators, including the Securities & Exchange Commission, which launched its Division of Risk, Strategy, and Financial Innovation last year.

Schwab said that he expects the bidding war for top talent to resume eventually.

"The post-Tarp brain drain is turning around, with a significant increase in hiring at most large banks and proprietary trading firms," he said. "But comp will not reach levels prior to the summer and fall of 2008."