Hedge funds start new year with 2.63 percent gain

BOSTON (Reuters) - Hedge funds started the new year with gains thanks to rallying stock markets that gave them their best monthly performances in more than a year, new data released on Tuesday show.

Hedge Fund Research, a Chicago-based firm that tracks flows and performance in the $2 trillion (1.3 trillion pounds) industry, reported its that HFRI Fund Weighted Composite Index rose 2.63 percent in January.

The report is welcome news in an industry still embarrassed by last year's 5.16 percent loss when the broader Standard & Poor's 500 index closed flat and the Dow Jones Industrial Average rose 5.5 percent.

Many managers, especially some whose losses far exceeded the industry average, blamed erratic stock market fluctuations prompted by fears about Europe's worsening debt crisis and sluggish growth in the United States for the poor performance.

This year, hopes for a solution to Europe's problems and more encouraging economic data such as better jobs numbers in the United States have boosted stocks, which in turn has supported hedge fund returns. Still, the S&P 500 performed even better, gaining 4.4 percent in the first four weeks of the year.

Hedge fund managers specializing in selecting stocks were among the biggest winners, with those picking energy and basic materials companies gaining 4.04 percent. But funds that invest in high yield debt also fared well, rising 3.67 percent.

Indeed, hedge fund managers are generally feeling more optimistic about stocks, according to data from two other research firms. BarclayHedge and TrimTabs said on Tuesday that 45.4 percent of managers polled during the first week of January were bullish on the S&P 500, up from 42 percent in December.

They also reported that investors in hedge funds, which generally prefer to keep performance numbers and asset flows secret, pulled $5.2 billion out of the industry's estimated 9,553 funds in December, punishing managers for months of losses.

"From May 2011 onward, hedge fund performance was negative in every month except October," Sol Waksman, founder and president of BarclayHedge said.

(Reporting By Svea Herbst-Bayliss; editing by Andre Grenon)