Hedge funds declined in January as the rally in equity markets reversed in mid-month, according to the Hennessee Group, a hedge fund advisory firm.

The Hennessee Hedge Fund Index declined 0.50% in January, while the S&P 500 declined 3.70%, the Dow Jones Industrial Average declined 3.46%, and the NASDAQ Composite Index declined 5.37%.

“January was a challenging month as the equity rally was short-lived and reversed course mid-month," Charles Gradante, co-founder of Hennessee Group, said in a statement. "While 2009 was all about market beta, 2010 is going to be a year driven by alpha. Security selection will drive outperformance. We are already seeing greater dispersion and lower correlations, which should benefit hedge funds.”

The Hennessee Long/Short Equity Index declined 0.86% in January; the S&P 500 Index and Russell 2000 Index ended the month down 3.7%.

Health care was the only sector to experience gains in January, posting a 0.4% gain.

Sectors with the steepest declines included telecom, which fell 9.3%; technology, which declined 8.5%; and materials, which fell 8.7%.