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 & Poors 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%.