Total hedge fund assets increased in the third quarter, but assets lost in liquidations outpaced the increase from new fund launches in the second and third quarters, according to a new report.

First, the good news: Hedge fund assets increased by 3.3% in the third quarter to $2.68 trillion from $2.59 trillion in the second. New allocations to the hedge fund industry increased its total asset levels by an estimated $339 billion through the first three quarters of 2007, according to HedgeFund.net.

Emerging market hedge funds enjoyed especially swift inflows, with assets reaching an estimated $299 billion on the quarter, an increase of $48 billion through new allocations in the first nine months of the year. Specifically, the report says hedge funds investing solely in Brazilian markets have become a much larger portion of the total hedge fund assets dedicated to Latin America in the last year. Total assets in Brazil focused funds reached an estimated $7.7 billion in Q3, an increase of $3.3 billion in 2007 alone.

China-focused hedge funds continue to attract investors with total assets in these hedge funds reaching an estimated $22.8 billion, an increase of 89% through the first nine months of the year.

Natural resources-focused hedge funds have also fared well amassing some $170 billion in total assets through Q3, led by energy-focused funds with $133.8 billion.

However, problems in the credit markets affected inflows for structured credit hedge funds, which saw its total assets fall 9.9% in the quarter to an estimated $62.7 billion. The average structured credit hedge fund returned 2.2% year-to-date through September, according to the report.

HFN also estimates that 47.7% of all assets in hedge funds were allocated through funds of hedge funds last quarter, which is down from 48.2% in the second quarter.