The hedge fund industry generated a quarterly gain of 2.87 per cent in the third quarter, bringing the year-to-date performance to +4.67 per cent, according to
Crystal Capital Partners.

Institutional hedge funds largely outperformed the broader hedge fund universe over the quarter, having gained 3.87 per cent. They also outperformed the broader hedge fund universe for the year as a whole, up 6.49 per cent year-to-date.

Meanwhile, hedge fund industry assets rose by $80 billion in Q3, representing a new record high of $2.19 trillion. Allocators continued to favor the "more established" firms however, as $13 billion was directed to managers with over $5 billion in assets under management.

According to Crystal Capital’s quarterly hedge fund review, investors have been compelled to allocate to relative value arbitrage strategies, which posted $12.6 billion of new capital for the quarter. This brings year-to-date figures to $35 billion and total capital in the relative value arbitrage strategy to $586 billion - putting assets in this strategy roughly equivalent to the assets in hedged equity, the firm said.

While assets in the hedge fund industry rose to a new record high of $2.19 trillion, Crystal Capital Partners believes alternative investments should be emphasized in coming months, due to their ability to enhance risk-adjusted returns and limit downside risk.

"Investors generally turn to fixed income assets in times like these," the firm said in its Q3 Hedge Fund Review. "However, allocating an increased portion to fixed income assets is not a viable alternative, as we are effectively in a zero interest rate environment where nominal yields are less than expected inflation rates.

"In addition, investors in the space are experiencing considerable reinvestment risk as the complexities of finding suitable yielding assets for recently matured holdings has become a rather arduous undertaking," it continued.