Money managed by funds composed of hedge funds is down substantially, but a small group of top firms continue to consolidate market share.
Investors have been pulling assets from investment vehicles that allocate to hedge funds since 2008 when the financial crisis rocked performance and a small group were found to have placed money with Ponzi-schemer Bernie Madoff.
But the general pain has been a boon for the largest players in the space, including Blackstone Alternative Asset Management, UBS' A&Q Hedge Fund Solutions, HSBC Alternative Investments and Goldman Sachs Hedge Fund Strategies.
The combined $539.6 billion managed by the top 50 funds of funds at the start of 2014 is nearly 40 percent below the record $877 billion run in January 2008, according to Alpha's 2014 Fund of Funds 50 ranking. Though cumulative assets rose for the first time since the financial crisis—up $45.6 billion during 2013—53 percent of the additional capital came from growth at the top 10 firms, according to the Institutional Investor hedge fund publication.
The top six firms retained their exact rank from a year ago.
Blackstone had by far the largest gain, increasing from $44.8 billion in assets under management to $55 billion as of Jan. 1. Blackstone notably opened its fund to retail investors in July with the Blackstone Alternative Multi-Manager Fund. The vehicle has gained 8 percent since then by investing in managers from Waterfall Asset Management, Two Sigma Advisors and Cerberus, among others.
"The distance between the haves and the have-nots within the fund-of-funds industry has widened since the financial crisis," Alpha noted in its summary of the new ranking.
"Debilitating capital outflows by liquidity-hungry investors in the immediate wake of the global meltdown wiped out the most-fragile firms and forced the survivors to scramble to appeal to other investors—no easy task. As hedge funds become more institutional, investors fed up with paying double-layer fees for anemic performance are becoming more comfortable with sidestepping funds of funds entirely and investing directly with single-strategy managers."
The InvestHedge composite index, which tracks fund of fund performance, gained 8.67 percent net of fees in 2013 and is up 0.59 percent this year through May. The annualized return since January 1998 has been 5.20 percent.
—By CNBC's Lawrence Delevingne.