Hedge funds outperformed the S&P 500 in the first quarter of this year with average returns of 2.1% at a time when the industry has seen record investment in the sector.

Emerging markets funds led the charge with 5.5% in average returns with China at the top of the list. Convertible arbitrage funds, which benefited from increased volatility in the sector, also fared well with 4.67% average returns, according to Morningstar.