Hedge funds add new money in Q3 after heavy outflows

BOSTON Oct 19 (Reuters) - Hedge funds pulled in $1.1 billion during the third quarter, marking the first time investors added money after a full year of heavy outflows, a report released on Monday by Hedge Fund Research shows.

In the previous four consecutive quarters clients pulled out $330 billion from these loosely regulated funds, the Chicago-based research firm found.

Hedge funds now manage $1.5 trillion, HFR said, far off the $1.9 trillion they managed at the end of 2007.

The $1.1 billion increase could suggest that investors like pension funds and endowments are slowly returning to these riskier assets one year after the industry delivered its worst-ever returns.

Nearly two-thirds of the hedge funds surveyed by HFR reported taking in a total of $38 billion in new assets in the quarter. Other hedge funds saw $37 billion leave through redemptions.

For example, investors placed $6.8 billion in new net money with hedge funds that specialized in equity hedge and macroeconomic strategies, while they removed $5.7 billion from funds that specialize in strategies including relative value arbitrage and event-driven funds.

"The most recent data suggest that the sentiment of hedge fund investors has improved from historical lows, but investors remain selective about fund strategy and exposure characteristics," Kenneth Heinz, president of HFR said in a statement.

Because hedge funds are not required to reveal their asset flows or returns, investors eye data from HFR for possible trends in the industry.

With markets rallying now, the industry is on track to post its best returns in a decade only one year after losing an average 19 percent in 2008, HFR said. (Reporting by Svea Herbst-Bayliss, editing by Leslie Gevirtz)