NEW YORK ( TheStreet) -- Last year investors had little reason to applaud the performance of hedge funds or alternative mutual funds. During 2011, the Morningstar MSCI Composite Hedge Fund Index dropped 2.7%, a bad showing in a year when the S&P 500 gained 2.1%. Alternative mutual funds, which use strategies employed by hedge funds, also declined. Morningstar's long/short category lost 2.8%, while market-neutral funds lost 0.3%.The results were especially disappointing because hedge funds sell short and use other techniques that are designed to excel in the kind of difficult markets that prevailed last year. Hedge fund managers offered a variety of explanations for the poor showing. Weak markets in Europe and the emerging markets hurt funds that invest abroad. Managers in the U.S. and overseas had trouble distinguishing themselves because stocks of all kinds rose and fell together. In addition, commodities funds suffered because markets were choppy and indecisive. That made it hard for traders who do best when trends move in clear directions.
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