Hedge funds that reported their second-quarter returns to Morningstar rose an average of 5.25% in the quarter, slightly underperforming the S&P 500’s 5.81% rise and the MSCI World Index’s 5.82% gain. Year-to-date, hedge funds are up 7.77%, beating the S&P 500’s 6% return but falling short of the MSCI World Index’s 8.01% gain.

Although talk of market corrections in emerging markets has been gaining steam, hedge funds that specialize in these areas posted the largest gains, 9.7%. Among those, China, Russia and Brazil funds fueled strong performance.

Managed futures hedge funds recovered from a lackluster first quarter, producing a mean total return of 6.82%. Other strong gainers were equity net long and equity variable funds, rising 5.84% and 4.87%, respectively, as well ad event-driven and merger-arbitrage funds, up 4.82% and 3.45%, respectively.

“Overall, all hedge fund categories produced consistent returns and continued to contribute positively to 2007 year-to-date returns,” said Morningstar Hedge Fund Analyst Carey Teichman. “Strong economies in emerging markets and a rise in global equities pushed hedge fund returns upward for the year.”

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