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“The hedge fund industry saw net inflows for the second month in a row in September, which was a notable improvement from earlier this year,” said Sol Waksman, founder and president of BarclayHedge. “Year-to-date outflows shrank to $1.1 billion in September from $4.5 billion in August.”

While the flow picture is improving, the hedge fund industry continues to underperform popular benchmarks, gaining 1.8% in September while the S&P 500 rose 2.4%. For the first nine months of 2012, the industry earned a 6.1% return while the S&P 500 rose 14.6%. The 12-month spread is even wider: The hedge fund industry gained 7.8% from October 2011 to September 2012, while the S&P 500 rose 27.3%.

In a separate research note, TrimTabs reported that when ranked by performance, the top 10% of hedge funds returned a median 27.8% from January 2011 through September 2012, substantially outdistancing the S&P 500’s 14.6% rise, while the bottom 10% of all funds lost 25.6%. The top-performing funds also attracted significant inflows from hedge fund investors.

“The top 10% of best-performing funds attracted more than $10 billion in net inflows, while the bottom 10% of funds saw outflows of $6.4 billion,” said Charles Biderman, founder and CEO of TrimTabs. “The hedge fund industry had net inflows of $49.1 billion from January 2011 to September 2012, which leads us to believe the top funds accounted for 21.4% of the hedge fund industry’s inflows.”

The Hedge Fund Flow Report noted that over the past 12 months, Equity Long Only funds earned a 15.2% return, the best performance among the 13 major hedge fund categories that TrimTabs and BarclayHedge track. Despite outperforming the hedge fund industry by more than seven percentage points, these funds saw outflows worth $4.1 billion.

“Given that the top-performing equity hedge fund categories cannot seem to outperform a low-cost equity index fund, it’s no surprise that investors are avoiding the higher fees of equity hedge funds,” Biderman said.

Biderman noted that hedge fund investors seem to be avoiding risk across the board, settling for middling-to-low returns. “All 13 hedge fund categories had positive returns in the past 12 months,” Biderman said, “but only the top three — Fixed Income, Multi-Strategy, and Macro — had net inflows.” This caution yielded lower returns: 8.3% for Fixed Income, (5th of 13), 3.8% for Multi-Strategy (11th), and 3.6% for Macro funds (12th).

Among the eight global regions tracked in the report, Continental Europe funds had the highest inflows in September at 1.5% of assets, while Canadian funds had the highest y-t-d flows (-0.6% of assets) and Japanese funds had the strongest 12-month flows (1.4% of assets). All eight regions posted gains in September, and seven posted y-t-d and 12-month gains. Latin American funds had the strongest y-t-d outflows at -11.9% of assets. “As we’ve seen for the past couple months, hedge fund investors appear to be betting on a rebound in euro-denominated securities,” said Leon Mirochnik, Vice President at TrimTabs.

Meanwhile, the October 2012 TrimTabs/BarclayHedge Survey of Hedge Fund Managers found that while hedge fund managers were most likely to be neutral on the S&P 500 for November, bearish sentiment dipped to a 12-month low. Conducted in late October, the survey of 73 hedge fund managers also found that most see less than a 50/50 chance of a recession in Q1 2013 in response to who wins the U.S. presidential election.

Press release

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