A Hedge Fund Research report estimated there are now 10,500 hedge finds worldwide and assets under management rose by 29 per cent last year. Net deposits for the year were at $126.5 billion - over double the level for 2005.
However, the HFRI Fund Weighted Composite Index returned 12.85 per cent, compared to S&P 500 Index that produced returns of 15.8 per cent.
Furthermore, fourth quarter inflow rates fell back with $15.8 billion heading towards hedge funds off the back of the collapse of Amaranth in September.
HFR president Ken Heinz said: "While several strategies did post outflows for the fourth quarter, the general trend in flows continues to be positive.
"This is glaringly evident when you consider that total industry assets have increased by 47 per cent in the last two years."
Brett Barth, partner at BBR Partners, told Bloomberg: "The third quarter was particularly weak, and after that, some investors pulled back on allocations. After Amaranth, people pulled money from managers with similar strategies.
"Fourth-quarter performance for hedge funds was really good, so my guess is you'll see a pickup in assets in the first quarter of this year.''