Put Away the Hankies, Hedge Funds Still Thriving

They're up about 8% this year, according to one gauge.
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The conventional wisdom on Wall Street is that many hedge funds are getting killed by the stock market rally because so many of them are stubbornly bearish.

But once again the conventional wisdom is wrong and many big hedge funds are firmly in the black for the year -- even if they aren't setting the world on fire with their returns.

The CSFB/Tremont Hedge Fund Index, which gauges the performance of more than 400 funds, is up 7.9% since the beginning of the year. That's not far behind the 9.5% rise in the

Dow Jones Industrials

over the same period.

Hedge fund performance also compares reasonably well to the 12% gain this year in the

S&P 500

. The only major stock index that really tramples the hedge funds is the

Nasdaq Composite

, which is up 21.5%.

Hedge fund returns do lag behind those posted by many big mutual funds. Morningstar.com, which tracks the performance of the mutual fund industry, reports that many large mutual funds are up anywhere from 10% to 15% this year.

But the overall performance of hedge funds shows that many are not perma-bears wedded to bets that stocks will fall in price.

In recent years, hedge funds -- loosely regulated investment funds that cater to wealthy investors -- have grown in popularity because they can take both short and long positions in stocks. Some wealthy investors have gravitated to hedge funds because they tend to be more nimble traders than traditional mutual funds.

Yet some hedges are beating the gains in the Dow Jones and the S&P 500. To date, the best-performing hedge funds are ones that specialize in investing in distressed debt, equities and other assets. So-called distressed funds are up 14% for the year, according to the index, which is a joint venture of Credit Suisse First Boston and Tremont Capital Management.

Not surprisingly, the worst-performing hedge funds are ones that maintain a bias towards being short in stocks. To date, those funds are down 19.5%.

But for now, dedicated short funds appear to be in the minority in the hedge fund world.