Asian hedge funds attracted $518 million in net new capital in the final three months of last year, according to Hedge Fund Research, Inc.--making it the best quarter of the year for the industry. 

With concerns about inflation starting to displace fears about the global recovery, investors sought out inflation-hedging strategies in particular, noted Kenneth J. Heinz, president of the Chicago-based research firm.

“Concerns have shifted away from a double-dip global recession and on to inflation and scenarios of global inflation,” he said.

Including performance gains, assets invested in Asia-focused hedge funds increased by $4.4 billion during the fourth quarter, to $83.4 billion. That was the biggest increase since the third quarter of 2009, according to Hedge Fund Research. For all of last year, assets invested in Asian-focused funds grew by $6.6 billion, making the year the strongest since 2007.

Asian hedge fund performance was a hair better than hedge fund performance globally in 2010. Hedge Fund Research’s Fund Weighted Composite Index, a broad-based measure of performance across the entire hedge fund industry, was up 10.32% for the year. Its Asian hedge fund index, by comparison, rose 10.77% last year.

Within Asia, the best hedge fund performance last year came from India. Hedge Fund Research’s India Index gained 15.47%. The company’s China hedge fund index, meanwhile, was up 9.37% for 2010.

How were investors in Asian hedge funds allocating their money to guard against inflation? In the fourth quarter, 35% of new investor inflows went to funds focused on Asian equity markets.

“People are realizing that equity market exposure is the best inflation hedge,” said Heinz.

And for the full year, investors allocated $765 million to event-driven Asian hedge funds, which include distressed and activist strategies.

The robust performance of Asian hedge funds last year occurred against a backdrop of overall spotty performance in the region’s stock markets, Heinz said.

“Even though there was a very wide disparity of performance of underlying Asian equity markets in 2010, the performance Asian hedge funds was relatively strong,” he said.

Asia-focused hedge funds ended 2010 with $83.4 billion. That number is an improvement on 2009, when assets were $76.3 billion, and 2008, when they stood at $71.4 billion. But assets are still far below their peak year of 2007, when they totaled $111.4 billion.

The fourth-quarter net asset flows into Asian hedge funds represented a sharp turnaround from the first quarter of the year, which saw net outflows of almost $700 million. Inflows rallied from that low point in the second quarter, when they totaled $362 million, and in the third, when they totaled $328 million, according to Hedge Fund Research.