Hedge funds experienced their biggest quarterly rise in assets under management in the third quarter, growing by $120 billion, according to data released Tuesday by Hedge Fund Research.

Most of the increase came from investment performance, with the HFRI Fund Weighted Composite Index posting a gain of 5.17%.

Hedge funds also pulled in $19 billion of new money during the third quarter. It was the third consecutive quarter that investors added to their holdings of these private investment vehicles. The industry took in $9.5 billion of new money in the second quarter and $13.7 billion in the first quarter.

By comparison, investors yanked $131 billion out of hedge funds in 2009 after withdrawing $154 billion in 2008.

HFR said the combination of investment performance and new investments pushed the cumulative net asset value of its broad-based index over the previous record level set in October 2007.

“After three years, the industry has emerged from the worst cumulative performance drawdown in its history, which had lost more than 21.4% through the volatility of the financial crisis,” the company said in a press release.

Total industry assets of $1.77 trillion as of Sept. 30 were still below the peak of $1.86 trillion in 2007, however.

The total number of hedge funds, including funds that invest in other hedge funds, rose slightly to 9,175 at the end of the third quarter from 9,083 at the end of the second quarter. At its peak in 2007, the industry was comprised of just over 10,000 funds.

HFR’s most recent data indicate that 201 hedge funds were launched in the second quarter and 177 were liquidated.

It's an industry dominated by a small number of very large funds. Approximately 5% of the 9,175 funds have more than $5 billion under management and collectively account for just over 60% of the industry’s assets. But just over half of the total number of funds have less than $100 million each under management.

“With the recent performance gains, the hedge fund industry has clearly passed a significant milestone in its evolutionary history,” said HFR President Kenneth J. Heinz. “In the last three years, hedge funds have become more strategically diverse, structurally accessible and transparent to investors, and, as a result, the industry is well-positioned for continued strong growth in coming quarters.”