Hedge Funds Hang In

What subprime slime?

Despite volatility tied to a retrenching financing market for big buyout deals, hedge funds in the first half of 2007 managed to top their performance of the past few years.

According to Chicago-based industry data group Hedge Fund Research, a composite index of some 2,000 hedge funds generated returns net of fees of 7.7% in the first half of the year. That outpaces the 6.9% gain achieved by the benchmark Standard & Poor's 500 index during the same period.

The solid return numbers come at a time when Wall Street is stressing over the fallout from subprime credits and collateralized debt obligations, which are pooled investments including securities linked to subprime credits.

Esoteric CDOs securities have managed to baffle the likes of Bear Stearns(BSC Quote), which reported last week that two highly leveraged hedge funds affiliated with the New York-based investment bank were essentially worthless. Earlier in the year, UBS(UBS Quote) shut down its own hedge fund entity, Dillon Read Capital Management.

Hedge fund investors have been big investors in CDO securities, and a number of independent firms have experienced some pain, including Australian hedge fund Basis Capital. It was seen unwinding its securities last week.

The volatility generated by the subprime drama may have provided opportunities for hedge funds to bang out big returns while a handful of other firms bit the dust on wrong-way bets.