Hedge funds are having their best year since 1998, yet most fund managers still are well below their peaks before the market's meltdown last year, industry analysts said.

Hedge fund assets rose 2.5 percent in July, contributing to a 9.9 percent climb over the first seven months of the year, and the best year-to-date results since 1998, Credit Suisse/Tremont Hedge Fund Index said.

The industry has a long way to go to recover from 2008, when funds on average suffered their worst year ever and investors redeemed record amounts of money.

Morningstar found that only 8 percent of the funds it follows fully recovered from drawdowns since the beginning of 2007. The group mostly includes funds that use global trend strategies -- global macro funds and managed futures funds.

These funds, which invest in commodities and currencies, suffered the lightest or no losses last year as stock and credit markets tanked.

By contrast, the strategy with the fewest funds recovering crisis losses were those funds focused on distressed securities, which were hit especially hard last year.

It takes a long time to recover from drawdowns. There is a compound effect, Morningstar hedge fund analyst Nadia Papagiannis told Reuters. Given where we are with the economy, we're still not out of hot water.

High-water marks are a critical measure for hedge fund managers. It represents the value they must exceed before they can start generating performance fees of 15 to 50 percent.

Since hedge fund drawdowns began in November 2007, fund assets fell more than 25 percent, Morningstar said. Hedge funds have begun to grow again, but have recovered 14 percent, or a little more than halfway.

Overall, a Morningstar index of 1,000 funds rose 2.2 percent in July, and 11.5 percent this year through July, the firm said on Tuesday.

Another data provider, HedgeFund.net said on Tuesday that total hedge fund assets rose 6 percent in the second quarter to $1.79 trillion, as rising asset values more than offset $25 billion of customer withdrawals. But net investments in May and June have turned that trend around.

Emerging markets-focused funds rank among the best performing funds this year, up 21 percent, and have seen some of the highest rates of investment, HedgeFund.net said.

Managed futures funds, which have lagged this year after leading the pack in 2008, are still attracting funds. By contrast, convertible arbitrage funds have soared this year, up 22 percent so far, yet new investment has been slow to follow, HedgeFund.net said.

(Reporting by Joseph A. Giannone. Editing by Robert MacMillan)

Credit Suisse Investment