Fresh off of a year in which they poured record amounts of money into hedge funds, investors were a good deal more reticent about continuing to do so in the first quarter.

Hedge fund inflows during the first three months of 2008 totaled just $16.5 billion, according to Hedge Fund Research. The 0.38% increase in capital—the smallest increase since the second quarter of 2004—leaves the industry managing $1.875 trillion. The 0.87% capital flow is the smallest since the last quarter of 2005, when the industry experienced a net redemption.

The miniscule inflow also means that the hedge fund industry has a lot of work to do to top last year’s record inflow of $194 billion.

“The financial market volatility which characterized the second half of 2007 accelerated into Q1 2008, resulting in a broad dispersion among the returns posted by fund strategies,” Kenneth Heinz, HFR president, said. “In some cases, the performance differentiation has been extreme, ranging from liquidations to gains of hundreds of percent. Investors slowed allocation in total and re-allocated from arbitrage and the more volatile macro strategies into more diversified strategies and those designed to identify opportunities in a weak credit market.”

Among the winners in the reallocation game was equity hedge, which added $8.2 billion in new money, but still managed to see its total assets fall due to poor performance. Distressed and special situations added almost $8 billion, and relative value took in $6.5 billion. Merger arbitrage and macro funds, on the other hand, suffered redemptions of about $4 billion and $1 billion, respectively.