Hedge funds’ strong performance in September pushed total industry assets near $2 trillion, according to Hedge Fund Research. Data from Hedge Fund Research, which tracks the performance of more than 11,000 hedge funds, showed that virtually all hedge fund strategies produced positive returns in September, with the HFRI fund weighted composite index rising 2.98% for the month. That compares with a loss of 1.5% for the index in August.

The only one of 26 discrete strategies tracked by the research group that was in the red last month was short-selling. Thanks to the enthusiastic response of global stock markets to the Federal Reserve’s half-point interest rate cut, short-sellers lost an average of 3.14% during September, after gaining nearly 12% over the previous three months.

Investors poured another $8.86 billion into hedge funds during August despite the collapse of several funds and general turmoil in the credit markets. Capital flows data have a one-month lag, so September numbers were not available.

It appears that investors were allocating capital through the volatility and it paid off in September. According to the research, a total of $144.5 billion has been invested in hedge funds this year through August—already topping the record $126.5 billion that was allocated to the industry for the whole of 2006.

The hottest strategy continues to be emerging markets. The HFRI emerging markets index returned 4.91% for September and is up 20.44% for the first nine months. Other standout strategies included equity non-hedge investing (equity investing with less hedging of risk), which posted a return of 4.61% for the month, and technology investing, which posted a gain of 3.3%.

September was also a good month for credit-driven strategies focused on high-yield bonds, mortgage-backed securities and convertible bonds. The HFRI indexes of those strategies all posted positive returns after losses in August. The still volatile credit markets, however, will be a major factor in the fortunes of hedge funds going forward. Credit market conditions will continue to be a driver of performance for the rest of the year.