By Patturaja Murugaboopathy

(Reuters) -Assets held in crypto funds hit a record high in May as easing trade tensions lifted risk appetite and some investors used the digital currencies to hedge against market volatility and diversify from their U.S. holdings.

Morningstar data on 294 crypto funds shows they attracted $7.05 billion in net inflows last month, the highest since December, bringing total assets under management to a record $167 billion.

Nicolas Lin, CEO of fintech firm Aether Holdings, said bitcoin "is starting to come into its own again", not just as a high-volatility asset, but as something that more investors are using to hedge their exposure.

Bitcoin has gained more than 15% over the past three months, outperforming a 3.6% rise in the MSCI World Index and a 13.3% gain for gold.

Nic Puckri, analyst and founder of Coin Bureau, said one of the main drivers of bitcoin's rise is a loss of faith in the U.S. investment story.

"The greenback is projected to keep plummeting, bond yields are rising, there's uncertainty about the equity markets. But bitcoin seems to be holding strong."

Bitcoin has been buoyed by institutional inflows over the past year following the approval of spot bitcoin and ether ETFs in the United States.

In contrast to the crypto funds, Lipper data showed a net $5.9 billion flowed out of global equity funds in May, while gold funds posted their first outflow in 15 months, of $678 million, pointing to a broader shift in portfolio diversification.

"I think flows will stay strong, but probably more steady than the rush we saw after the ETFs launched," said Aether Holdings' Lin.

"That initial wave was a bit of a release valve. What's happening now is more important, it's the start of crypto becoming a permanent fixture in diversified portfolios."

According to Coinshares data, bitcoin funds attracted a net $5.5 billion and ether funds a net $890 million in May.

(Reporting By Patturaja Murugaboopathy; additional reporting by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan,Kirsten Donovan)