Morningstar said its MSCI Composite Hedge Fund Index rose 1.9 per cent in January and advanced 6.3 per cent during the trailing 12 months.

“Reduced global economic and political uncertainty during January fueled a broad increase in appetite for risky assets,” said Philip Guziec, alternative investing strategist at Morningstar. “Excluding the short biased category, all hedge fund strategies were up for the month, and the most risk-sensitive strategies posted the strongest performance.”

January started with a two-day rally in equity markets, accounting for most of the 5.2 per cent rise in the S&P 500 Index for the month, the firm said.

Meanwhile, the MSCI North America Hedge Fund Index, which primarily includes long-short equity hedge funds, ended the month up 2.3 per cent, while the Russell 2000 Index jumped 6.3 per cent and the MSCI Small Cap Hedge Fund Index rose 3.9 per cent.

The MSCI Emerging Markets Hedge Fund Index was up 3 per cent in January, driven by positive economic news from China about GDP and exports.

Meanwhile, “widespread investor optimism” sent less risky fixed-income strategies down during January, whereas high-yield and relative-value hedge fund strategies posted gains, it added.

In December 2012, single-manager funds within Morningstar’s hedge fund database saw outflows of $4.7 billion. This represented the fourth consecutive month of outflows and more than half of the $7 billion that investors pulled from hedge funds in the database during 2012.

"This was a sharp reversal from investor behavior seen during 2011 and 2010, when funds in the Morningstar Hedge Fund Database received inflows of $17.9 and $10.1 billion, respectively," Morningstar said.