Hedge fund returns rose for the sixth straight month in August but underperformed the broader stock market, where hopes of a quick economic recovery fueled strong gains last month, according to data released on Tuesday.

The average hedge fund rose 1.85 percent last month while the Standard & Poor's 500 index gained 3.36 percent, the Hennessee Group reported.

Hedge funds continued to lag the surging equity markets as we would expect given their short portfolios and hedges, Lee Hennessee, one of the consulting group's managing principals, said in a statement.

August's stronger returns -- following on the heels of a 3.11 percent increase in July -- signal that the $1.4 trillion hedge fund industry is recovering ground less than one year after suffering its worst-ever losses.

Still, investors remain skittish about leaving their money with hedge funds according to recent data showing that clients pulled nearly three times as much money away from funds in July than in June.

Hedge fund managers are not required to report their returns and so investors and industry analysts keep a close eye on reports from the Hennessee Group and others that track performance to keep tabs on how the industry is performing.

Performance and flows tracker Hedge Fund Research is expected to report its findings in a few hours.

Since January, the average hedge fund has gained 17.30 percent, the Hennessee Group reported. During the same time the S&P 500 gained 12.99 percent.

Managers who bet on emerging markets and financial stocks plus media and telecommunications offerings last month scored the largest gains and helped boost the overall index.

So-called short sellers who bet exclusively that stock prices will fall lost 1.23 percent in August, leaving them as the industry's biggest losers this year, with a year-to-date loss of 11.47 percent.

Despite strong returns this year, investors have continued to pull money out of the hedge funds after having removed a record $152 billion in the last quarter of 2008.

In July, the most recent month for which data is available, clients redeemed $20 billion from hedge funds, significantly more than the $6.9 billion they pulled out in June, according to data from TrimTabs Investment Research.

That is a huge number, research analyst Vincent Deluard said, explaining that investors may finally be getting back the money they asked for late last year when fund managers prohibited many clients from exiting.

(Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick and Matthew Lewis)

Investment