Hedge funds rise in 2010 but lag broader market

Hedge funds ended the year with double-digit gains but lagged behind the average stock market indexes and fell short of the average stock mutual fund's returns as well as their own more powerful rise in 2009.

In 2010, global hedge funds on average returned 10.2% to their wealthy investors, according to data released by the Hennessee Group on Friday.

Late-year stock market gains helped many managers stage dramatic turnarounds from the losses they notched in the first months when Europe's growing debt crisis and fears about the pace of the US recovery weighed on returns.

But hedge funds, which have become more popular with pension funds as well as wealthy individuals in the last years, failed to keep pace with less costly alternatives. The S&P 500 index gained 12.8% and the average stock mutual fund rose 17.48%, according to data from Lipper Inc.

Indeed hedge funds, known for promising strong returns in all types of markets, did not even come close to their 19% gain posted in 2009.

Hedge funds tend to charge a 2% management fee plus 20% of their profits. Mutual funds generally do not charge performance fees.

Hedge funds are not required to report their returns publicly and most managers try to keep their performance secret, leaving investors to follow what few numbers are released very closely for signs of what is happening in the USD 1.7 trillion industry.

Other research firms that track performance and flows will release their numbers later on Friday and early next week.

Some of the year's standouts include fund manager Dan Loeb's Third Point Offshore fund which gained 31.49% through December 21, and Louis Bacon's Moore Emerging Equity L/S Fund which was up 31.72% through December 16.

Activist investor William Ackman's Pershing Square International fund had surged 20.77% through the middle of December.

John Paulson, whose USD 33 bn hedge fund is closely watched for investing trends, told investors that his Advantage Plus Fund returned 17% in 2010 while his Gold Fund surged 35%.