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Hedge fund assets hit record high despite huge redemptions

People walk past the New York Stock Exchange in New York City.
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People walk past the New York Stock Exchange in New York City.

Amid some pretty daunting headwinds for the industry, hedge fund assets actually have climbed to new highs.

The industry now manages just shy of $3 trillion, according to the latest count from industry tracker HFR.

Assets rose 2.5 percent to $2.97 trillion, despite investors yanking $28 billion, the biggest quarterly outflow since the second quarter of 2009. That brought year-to-date outflows to $51.5 billion.

The reason behind the asset surge was performance — the HFRI Fund Weighted Composite Index rose 2.9 percent, bringing the benchmark's gain this year to 4.2 percent. That still lagged the S&P 500, which gained 6.4 percent through the period. (Another industry benchmark, the Preqin All-Strategies Hedge Fund index, rose 4.06 percent through the first three quarters.)

Industry watchers are hopeful that the Federal Reserve will resume hiking interest rates soon, which will in turn heighten market volatility and create more opportunities to generate outperformance.

"Total hedge fund industry capital has reached a record high as the U.S. economy prepares to conclude an extended interest rate cycle which has de-sensitized many investors to risks in financial markets, while suppressing asset volatility and hedge fund performance in recent years," HFR President Kenneth Heinz said in a statement.

"As rates are allowed to normalize, fundamental, mean reversion across many specialized long short strategies is likely to drive strong performance and industry growth into 2017," he added.

That the industry is still seeing a net gain in assets is remarkable considering the stream of high-profile redemptions.

Brevan Howard saw more than $3 billion in outflows during the first half, while other big-name managers including John Paulson, Richard Perry and Dan Och all have seen significant redemptions.

In fact, it's the biggest funds that have seen the most withdrawals.

Firms with more than $5 billion under management accounted for $22 billion of the $28 billion in outflows for the quarter, while those with between $1 billion and $5 billion lost $7.4 billion, according to HFR. Smaller firms actually had modest net inflows.

Event-driven was the biggest category for investor redemptions at $15.4 billion. Yet funds using the strategy actually saw net capital gains of $19.4 thanks to strong performance.