Hedge Fund Assets Near 2008 Peak Levels

The average fund earned 20% in 2009 and 10.3% in 2010, according to Hedge Fund Research, failing to match the 26.5% and 15.1% gains in the Standard & Poor's 500 stock-index in those two years.

In this year's first quarter, the S&P 500 rose 5.4%, more than three times the 1.6% average hedge-fund gain, according to the research firm.

Pension fundsand other big investors, however, need to diversify beyond the stock market, and the current low-interest-rate environment has made it difficult to find attractive returns elsewhere.

"Flows into quality funds have resumed," Lawrence Robbins, head of Glenview Capital Management told the paper. The firm suffered significant losses in 2008, but has brought in more than $1 billion in new money since the bottom, according to a person familiar with the firm.

Nevertheless, fund managers told the paper the industry isn't on the kind of roll it was before the financial crisis, when it was growing more rapidly and rookie managers found it easy to raise money.

The industry is saddled with new regulationthat grew out of the crisis. Investors are being more selective about where they invest. Hedge funds remain restrained in their use of leverage—or borrowing to amplify their returns, which increases risk. Managers are wary of scrutiny from insider-trading investigations and calls from Washington for more regulation.