LONDON For hedge funds that made money this year there was only one strategy that really mattered - latching onto the stockmarket rally.
For everyone else 2013 proved another tough year as big-name funds as varied as global macro, commodity and computer-driven funds struggled to make money, eating further into the track record of these one-time 'masters of the universe.'
So far this year the average hedge fund is up 8.2 percent - their best year in three but lower than a near 21 percent rise in the MSCI World Index for stocks.
More worrying is that longer-term performance over key three- and five-year periods is also looking poor.
Hedge funds have made returns for their investors of 9.4 percent since 2011, and 39.6 percent since 2009, data from Hedge Fund Research shows, but an investment in a fund tracking global stocks would have made around 32 percent and 75 percent respectively.
"If you look at the average hedge fund versus equity or directional markets, this year has been disastrous," Roberto Botero, a director at Sciens Capital said.
"In general you would expect hedge funds to underperform in an equity market rally. But the issue is they have been underperforming for the last five years, with very few exceptions," Botero said.
The problem this year has centred on managers' inability to get ahead of central bank monetary action, which has driven markets, and the fact asset prices have headed upwards almost continously, leaving funds which "hedge" against downside risk left behind.
Hedge funds claim that they can make money in all markets and deliver returns with less volatility than traditional assets over the medium term, but this can be a hard sell when stock markets are rising so quickly.
"Arguably in the long term it's fine but it doesn't feel good when equity markets are up 20 percent or more," said Anthony Lawler, who invests in hedge funds at asset manager GAM.
WINNERS AND LOSERS
Still, some funds outperformed.
Lansdowne Partners' $10 billion long-short equity fund was up 33.3 percent by mid-December, helped by gains in one of its largest holdings, Lloyds Banking Group (LLOY.L), while Egerton Capital's main fund was 23.5 percent ahead, data seen by Reuters shows.
Credit-focused funds also beat traditional investments, with funds trading high-yield debt returning 8 to 10 percent, investors familiar with the sector said.
Elsewhere, global macro managers, who bet on shifts in the global economy and are among the most-celebrated in the industry, struggled to get to grips with central bank policy.
Funds who bet Japan's monetary stimulus would send the yen sliding, like those run by Caxton Associates and Moore Capital, generated double-digit gains but others found it tough to make money from their usual bets on Treasuries as the United States moved towards tapering its $85 billion a month asset-buying programme.
The $16 billion BlueCrest Capital International fund is flat while Brevan Howard - the largest hedge fund manager in Europe - had only made 2.2 percent in its Master fund by the end of November.
Meanwhile computer-driven funds, staffed by mathematicians who employ complex algorithms to try and outwit markets, had another down year amid a lack of discernible trends in markets.
BlueTrend - part of BlueCrest Capital - fell 8.7 percent during the first 11 months of 2013. Aspect Capital lost out too and was down 6.5 percent by mid-December, while Cantab Capital suffered a far-bigger 29 percent plunge in its main fund.
With traders failing to make money as volatility fell and price moves in key oil and copper markets stayed small, commodity funds also dropped for the third year in a row.
While the average commodity fund is down 4.3 percent Newedge data shows, one of the biggest and best-known funds - Clive Capital - decided to call it a day in September and closed.
Lawler at GAM said the dominance of machine traders in markets had made it particularly tough for other commodity managers, and he remained underweight in the sector.
NEW MONEY KEEPS ON COMING
Despite the relatively poor performance, investors continue to put more money into hedge funds.
Total net inflows by the end of November topped $71 billion, almost double last year, eVestment said in a report this week. Combined with performance gains, this has raised industry assets to $2.8 trillion, 3 percent below its all-time high.
Institutional investors are fuelling the inflows, believing that when markets skid hedge funds will offer them the best protection from losses on their stock and bond holdings.
"Hedge funds need a year when you get more differentiation across markets. Maybe next year will bring that, but if funds still can't perform better, then what can managers say ?," Botero said.
(Additional reporting by Chris Vellacott; Editing by Carmel Crimmins and Greg Mahlich)