The final result for 2011 is in: hedge funds posted one of their worst annual performances ever, according to data released on Monday.
The average hedge fund sank 4.8 percent in 2011, data compiled by Hedge Fund Research showed. The Standard and Poor's 500 stock index, by comparison, ended the year roughly flat. In 2010, the average hedge fund rose by more than 10 percent.
2011 marks only the third calendar year since HFR began measuring industry-wide performance in 1990 that hedge funds have finished in the red.
It is also the industry's second decline in four years.
Even though the fourth quarter of 2011 saw hedge funds gain 1.3 percent, that small boost barely helped firms whipsawed by record volatility in the third quarter as the European sovereign debt crisis sent markets into freefall, and the U.S. economy stagnated. Hedge funds lost almost 7 percent from the beginning of July through September 30.
Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis, said Kenneth J. Heinz, president of HFR.
The final month of 2011 brought little relief for bruised investors. In December, the HFRI Fund Weighted Composite index lost 0.18 percent.
Industry-watchers were surprised by some of the big-name stockpickers who stumbled in the latter half of last year, and December offered no respite for traditional long/short funds, which make bets on some stocks rising and others falling.
The HFRI Equity Hedge (Total) Index, which measures performance of those managers who specialize in going long and short stocks, lost 0.66 percent in December, sending losses for the strategy to about 8 percent for the year.
(Reporting By Katya Wachtel, editing by Dave Zimmerman)