UPDATE 3-Hedge funds suffer worst losses, but beat markets

(Recasts first paragraph; adds names of losers and winners)

By Svea Herbst-Bayliss

BOSTON, Jan 8 (Reuters) - Hedge funds suffered their worst full-year loss ever in 2008 and some of the industry's biggest stars took a beating but their decline was less steep than the 38 percent drop for the average stock mutual fund, data released on Thursday showed.

The average hedge fund lost 19.2 percent last year according to data from New York-based consultants the Hennessee Group, and 18.30 percent according to Chicago-based Hedge Fund Research (HFR).

Funds of hedge funds, which promise to build a portfolio of individual hedge funds to spread the risk, fared the worst of all, losing 19.97 percent, HFR said, citing exposure to accused financial swindler Bernard Madoff as a major reason for the losses.

Richard Perry's $8.3 billion Perry Partners International fund lost roughly 24 percent last year while Dan Loeb's $2.6 billion Third Point Offshore fund ended 2008 down 32.18 percent, according to people who saw their numbers.

Loosely regulated hedge funds portfolios did snap a six-month losing streak with tiny gains in December. Final data compiled by Hennessee showed the average hedge fund edged up 0.51 percent last month while HFR data showed a 0.41 percent gain.

The main driver behind the year's losses was the 36.93 percent drop posted by funds specializing in energy and basic materials trading. Funds specializing in fixed income convertible arbitrage lost 34.61 percent, according to HFR.

Emerging market funds, which once performed so well, lost money with the Emerging Markets (Total) Index down 36.23 percent, HFR said.

SOME WINNERS

On the other hand, funds that concentrate solely on betting that stocks will decline -- so-called short sellers -- emerged as the year's biggest winners with a 28.25 percent gain, HFR data show.

Individual managers pursuing other strategies also succeeded. Alan Howard's $16 billion Brevan Howard Fund gained roughly 21 percent last year and John Paulson's $10 billion Paulson Advantage Plus fund gained 38 percent. Paulson was one of the first to correctly predict the U.S. housing slump.

At the end of October, industry analysts estimated that hedge funds managed $1.56 trillion, after starting the year at roughly $2 trillion. They expect the number to be much lower now, possibly closer to $1 trillion.

Hedge funds have been hammered by the worst global financial and economic crisis since the Great Depression. These investment vehicles, which have long promised to make money in all markets, lost billions for wealthy investors, endowments and pension funds last year.

But the data illustrate how aggressive trading techniques -- ranging from selling stocks short to using borrowed money -- gave the hedge funds' wealthy clientele an edge over the stock mutual fund portfolios used by the vast majority of American workers to save for retirement and college.

The average hedge fund beat both the Standard & Poor's 500 stock index .SPX, which dropped 37 percent last year, and the average stock mutual fund, which lost 37.5 percent, according to data from Thomson Reuters unit Lipper Inc.