NEW YORK (CNN/Money) - Asset flows into hedge funds dropped 60 percent from the first quarter to the second quarter, reflecting investors' reaction to slumping hedge fund returns in the first part of the second quarter, according to new data.

Hedge funds took in $10.9 billion in new assets in the second quarter, down from $27.3 billion in the first quarter but up from $7.5 billion in the second quarter of 2004, according to Chicago-based research and index firm Hedge Fund Research. The firm estimates that hedge funds now manage a total of about $1 trillion.

Joshua Rosenberg, president of HFR, said the decline of flows from near-record levels last quarter is due to moderate returns and difficult market conditions, which caused investors to proceed with caution when it came to putting new money into hedge funds. The industry saw several significant new launches in the second quarter but also suffered a handful of high-profile liquidations during the same period.

"There was a decline [in the second quarter], but investors are still putting money into the hedge fund industry," said Rosenberg. "There is continued strength in the industry despite the fact that there was basically a mixed performance quarter, which consequently brought flows down on a sequential basis."

Not surprisingly, convertible arbitrage funds saw outflows, losing $4.15 billion in assets for the quarter, making these funds a major contributor to the slowdown in assets. That brings the strategy's total loss to $5.1 billion to date, or 15 percent of its total assets since the beginning of this year. Rosenberg said the strategy may continue to see outflows in the third quarter.

"It's been hurt quite a bit recently, and I wouldn't be surprised if there is a continued shakeout in that strategy," he said. "That said, there are still quite a bit of assets in that industry; they may well present opportunities for those that elect to stay in the game."

Industry watchers had expected a sharp decline in assets in convertible arbitrage funds because returns took a beating in April and May, causing investors to redeem and leading some convertible arbitrage hedge funds to close.

Equity and macro hedge funds took in the most money, with the two strategies taking in $3.2 billion in new money for the quarter. Macro hedge fund managers trade stocks, bonds, currencies and equities in hopes of anticipating and profiting from broad trends in the global economy.

The event-driven strategy, in which managers profit from corporate events such as mergers and restructurings, saw a significant decrease in assets from the first quarter to the second, with the strategy pulling in $2.5 billion in the first quarter, compared with $6 billion in the first. But it is still the top-gaining strategy for the year, pulling in $8.4 billion in assets so far.

"I don't think the drop is precipitous -- it's still a very popular strategy because of the way it can diversify across a variety of different corporate events," said Rosenberg. "When you look at how total fund flows performed quarter to quarter [the decline in event driven assets] doesn't mean anything other than there is less money flowing in overall."

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