Morningstar's database of hedge funds, excluding funds-of-funds, returned an average of 1.98% during the fourth quarter of 2007, outperforming the MSCI World Index and the Standard & Poor’s 500 Index.

“Hedge funds overcame a tumultuous fourth quarter, and managed to gain 14.13% for the year,” said Nadia Van Dalen, a Morningstar hedge fund analyst. “The credit crunch intensified in August and November, preventing hedge funds from significantly building on their previous gains.”

With a 32.0% return, emerging-markets equity hedge funds were the clear winners in 2007. The MSCI Emerging Markets Index outperformed the average hedge fund by more than 4 percentage points for the year, however.

Global equity hedge funds were the second-best performing category, with a 16.0% gain, about 9 percentage points ahead of the MSCI World Index.

Global trend hedge funds, which systematically follow price trends in futures and currencies, had an annual return of 14.7%. These funds earned 6.5% in the fourth quarter, more than any other category.

A surge in commodities, such as gold and oil, contributed to these gains. Global non-trend hedge funds saw opportunities to exploit the falling dollar, returning 14.9% for the year and 4.3% in the fourth quarter.

The U.S. equity small-cap category posted a small gain of 0.8% for the fourth quarter, but outperformed the U.S. equity category for the year with 13.6%.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.