Hedge fund war chest tops $2 trillion

NEW YORK (CNNMoney) -- Hedge funds reached a milestone in the first quarter, amassing over $2 trillion in capital for the first time ever, an industry tracker said Tuesday.

The global hedge fund industry now controls total assets worth $2.02 trillion, according to Hedge Fund Research. That's up $102 billion from the first quarter of 2010 and is more than the industry had in the second quarter of 2008, when assets peaked at $1.93 trillion.

This marks a dramatic recovery from the depths of the financial crisis, when panicked investors pulled out of hedge funds en mass. At current levels, hedge fund assets have rebounded 50% from the first quarter of 2009, when the industry controlled a mere $1.33 trillion.

These numbers reflect money that hedge funds took in from new clients in the quarter, as well as investment gains realized on trades of stocks, bonds, currencies and other assets.

In the first quarter, investors allocated $32 billion in new capital to hedge funds, which was the largest quarterly inflow in more than four years.

Kenneth Heinz, president of Hedge Fund Research, said the combination of strong performance and investor inflows "validates that the hedge fund industry has completed its recovery from the financial crisis."

Heinz attributed the growth to steps hedge funds have taken over the last two years to increase transparency and accessibility, which he said "will serve as the primary catalysts for growth to surpass future milestones."

Hedge funds are private investment partnerships that manage money for wealthy individuals and institutional clients. Unlike mutual funds, they cater to more "sophisticated investors" and are subject to less government regulation.

They often charge large fees and require investors to keep their funds locked up for long periods of time. Since the financial crisis, when many investors were blocked from withdrawing funds, many hedge funds have overhauled policies to increase accessibility.

In the first quarter, hedge funds benefited from broad-based gains in the financial markets. Stocks, as measured by the S&P 500, rose more than 5% in the first three months of 2011. And prices for commodities such as oil and gold continued to reach record highs.

At the same time, the industry has been besmirched by a spate of high-profile insider trading cases involving some major hedge fund players. Most notably, Raj Rajaratnam, the founder of Galleon Group, is facing 20 years in prison for allegedly using insider information on corporate earnings to make millions in the stock market.