Money, money and more money.
Investors poured more than $60 billion into hedge funds in the first three months of the year, or nearly half of the record $126 billion that flowed into the private investment pools for all of 2006, according to data released Thursday.
Some naysayers have predicted that the hedge fund wave will crest. "We haven't reached that point yet," said Ken Heinz, president of Hedge Fund Research Inc. of Chicago, which released the report.
Demand came from both individual and institutional investors, experts said, and was spurred by both solid investment performance and the lack of any headline-generating hedge fund meltdowns.
The statistics are further proof that hedge funds and their close cousins -- private equity funds -- are gaining mainstream acceptance, especially as investors seek alternatives to the recently gyrating stock market.
"Whenever I sit on an airplane, everybody wants to talk about who's hot," said Jane Buchan, managing director at Pacific Alternative Asset Management Co. in Irvine, which puts together hedge fund portfolios for large investors.
The inflows couldn't come at a better time for managers of hedge funds and private equity funds, such as Fortress Investment Group, which conducted an initial public stock offering earlier this year, and Blackstone Group, which is planning to sell shares to the public.
"It's good news for hedge fund people in general," said Lois Peltz, president of Infovest 21, a New York-based hedge fund research firm. "The strong asset flows are another sign of healthy times for the industry."
Hedge funds are known for their freewheeling investment styles and the sometimes outsized bets they make in global securities markets.
Private equity funds buy and restructure companies in hope of selling them at much higher prices within a few years.
In recent years, private equity and hedge funds have increasingly branched into each other's turf as they seek to expand into broader investment firms.
Anecdotal evidence suggests that the cash streaming into hedge funds is coming in part from stocks and bonds.
According to Infovest 21, for example, the Teachers Retirement System of Texas is boosting its hedge fund and private equity allocations to 10% each. Hedge funds were previously 1.7% of its portfolio and private equity was 2.4%.
By contrast, the retirement system's domestic stock holdings are dropping to 25% from 53% and fixed-income investments are falling to 20% from 26%, according to Infovest 21.
The average hedge fund bested the performance of the Standard & Poor's 500 stock index in the first quarter, but trailed it last year, according to Hedge Fund Research.
The firm's core hedge fund index rose 2.81% in the first quarter versus 0.64% for the S&P; 500. But its 12.9% showing last year trailed the S&P;'s 15.8%.