Pessimists were once again winners in the hedge fund sector last month, according to data released Friday, with short funds gaining more than 3% as the industry contracted and the broad markets posted double-digit declines. Hedge Fund Research, which tracks industry data, said its composite hedge-fund index dropped 0.5% in February, though short-biased funds rose 3.2%. So far this year, hedge funds that bet against equities have added 6.1%. The trend is unsurprising as major benchmarks have hit lows not seen in over a decade. The Dow Jones Industrial Average declined over 11% in February, and slumped further this month, falling below 6500 at one point Friday. The leading fund strategy was fixed-income convertible arbitrage, in which fund managers profit from huge differentials between a company's various bonds. Those hedge funds gained 3.3% in February, as a massive plan was unveiled to restructure the debt of Citigroup ( C) and AIG ( AIG). Credit-market dislocations also offered big returns for the debt and preferred shares of other major firms whose financial health has come into question, like Bank of America ( BAC), GM ( GM) and GE ( GE). In a volatile month in which the DJIA's high and low point had a differential of more than 1,300 points in just 19 trading sessions, the worst hedge-fund performance came from funds that bet on the direction of stocks based on quantitative analysis. Such quantitative funds fell 1.9% in February.