Assets invested in hedge funds rose by $100 billion in the second quarter of 2009, ending at $1.43 trillion, according to figures released by Hedge Fund Research. This is the first quarterly increase in assets since the second quarter of 2008 when total industry capital peaked at $1.93 trillion.

According to Eurekahedge managers saw net inflows of $6.2 billion or 0.5% for the second consecutive month. This coupled with negligible net losses of $350 million (0.03%) from performance brought the industry's assets to $1.33 trillion as at the end of the first half of 2009, a slightly lower figure than that estimated by Hedge Fund Research.

Gross inflows into hedge funds totalled $19.2 billion (or 1.5% of end-May assets), said Eurekahedge. About two-thirds of this was negated by redemptions of $13 billion. A good portion of these redemptions, nearly $5 billion, represented the assets withdrawn by funds of hedge funds, which continued to witness redemption pressures as investors are increasingly opting to invest directly into hedge funds for better returns and capital protection, as well as relatively lower fees, said Eurekahedge.

Hedge Fund Research said the recent asset growth was fuelled by performance gains during the second quarter. The HFRI Fund Weighted Composite Index returned 9.13%, the industry's best quarterly gain since the fourth quarter of 1999.

The strong performance was led by strategies focusing on emerging markets, convertible arbitrage and energy/basic materials. These three were among the weakest performers in 2008. This underscored the dramatic shift in market dynamics that has taken place this year.

As performance improved investors continued to withdraw capital from the industry, albeit at a much slower pace. According to Hedge Fund Research investors redeemed $42.8 billion from hedge funds in the second quarter, around 60% percent less than the $103 billion redeemed in the first quarter.

The organisation agrees with Eurekahedge that funds of hedge funds (FoHFs) continued to experience a higher percentage of capital redemptions than single-manager strategies. It estimates investors withdrew $33 billion from FoHFs in the second quarter.

Total capital invested in hedge funds via FoHFs currently stands at $530 billion, 37% of the industry's total capital and below the $825 billion invested through FoHFs at their peak level in mid-2008.

Continuing to reflect a challenging environment for new funds, the number of hedge funds, including single-manager and FoHFs, remained flat during the quarter at just over 8,900.

Despite recent performance gains, the industry remains below the high-watermark set in October 2007. The HFRI Fund Weighted Composite Index still requires an additional gain of 14.7% to reach its previous peak.

The equally-weighted HFRI Fund Weighted Composite Index posted a gain of 9.46% through June, while an asset-weighted version of that index returned 9.06%. On average funds with a lower asset base have outperformed larger funds in first half of the year.

This is a reversal from 2008 when the asset-weighted version of HFRI posted a decline of 14.96% compared with a 19.03% decline in the equally-weighted version.