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Hedge Funds End Wretched Year With Uptick

Hedge Fund Research's composite index showed a 0.4% return for the industry in December, while Hennessee Group reported a 0.5% gain last month.

The hedge fund industry closed out a miserable year on a positive note, posting a slight gain in December, according to data from two research groups.

Hedge Fund Research's composite index showed a 0.4% return for the industry, while Hennessee Group reported a 0.5% gain last month. But while the upside performance may be an indication that hedge funds are turning a corner, both groups also noted that 2008 was the worst year on record for the industry. Hedge Fund Research reported a full-year loss of 18.3% for hedge funds, while Hennessee calculated a 19.2% decline.

Hedge funds have long been touted as a way for high-net-worth individuals to reap mega returns, often with risky or new-fangled investment strategies. That view has taken repeated blows in recent months as funds posted negative returns through the crisis of 2008, and clients demanded their cash back.

Charles Gradante, co-founder of Hennessee, characterized year-end redemptions as "significant," saying that the average fund returned 15% to 25% of investors' assets.

Those demands, along with tough market conditions, have sent the industry reeling, with prominent hedge-fund companies like

Fortress Investment Group


placing restrictions on redemptions. Others, like


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are facing tougher times, as well.

Still, there were a few types of hedge funds that performed better than their peers, according to Hedge Fund Research. Short-bias indexes gained 28.3%, systematic diversified indexes rose 18.3%, macro indexes were up 5.7% and fixed-income asset-backed funds posted a slight gain of 0.8%.

At the other end of the spectrum were indexes weighted in energy and materials, which dropped 36.9%. Fixed-income convertible arbitrage funds were down 34.6%, and equity hedge indexes were off 26.4%.

Lee Hennessee, managing principal of Hennessee Group, took pains to note that while the sector at large had a sharp decline, it still beat the broad markets by nearly 20 percentage points.

"On a relative basis, hedge funds continue to prove themselves as an attractive asset class, generating a better risk-adjusted return than traditional money management," said Hennessee.