Hedge funds bounced back in 2002?s fourth quarter to end the year about where they started it. According to Index results released today by Van Hedge Fund Advisors International, Inc. (VAN), a global hedge fund advisory firm, the average U.S.-based hedge fund sustained a slight loss of ?0.2% after fees in 2002 while the average offshore-domiciled hedge fund produced a small 0.5% net gain for the year. U.S. hedge funds fell ?0.3% net in December but rose 3.5% net in the fourth quarter. Offshore hedge funds earned 0.5% net last month and 2.5% net for the quarter.

For the third consecutive year, the stock market has yielded steep losses while hedge funds have weathered the storm well. On a global basis, hedge funds were slightly positive in 2002, gaining 0.2% net, while the S&P 500 and NASDAQ fell ?22.1% and ?31.3%, respectively. Mutual funds didn?t fare much better for the year, as the Average Equity Mutual Fund lost ?20.3% in 2002. From the beginning of 2000 through 2002, the average hedge fund has returned 14.9% net of fees. The S&P 500, in contrast, has lost over a third of its value, falling ?37.6%. Hedge fund managers have clearly succeeded in finding and exploiting opportunities in these difficult markets, delivering on their reputation for preserving and growing wealth.

The big winners in 2002 were Short Selling hedge funds, which bet on falling, rather than rising, stock prices. U.S. Short Selling funds averaged a whopping 32.1% net gain for the year. Most hedge funds use short selling to some extent in their portfolio but these funds specialize in it. Market Neutral Arbitrage funds, which take advantage of various market inefficiencies and maintain a low overall market exposure, saw solid gains in 2002 as well. These funds averaged net returns of 8.5% in the U.S. and 7.5% offshore.

VAN?s research on hedge fund performance dates back to 1988, spanning a range of market conditions. VAN has found that hedge funds have outperformed a variety of more mainstream investment options, including stocks, bonds and mutual funds. U.S. hedge funds have generated a 17.0% net compound annual return over the past 15 years, well ahead of the S&P 500, the Lehman Brothers Aggregate Bond Index or the Average Equity Mutual Fund, which have produced compound annual returns of 11.5%, 8.6% and 8.5%, respectively. Given numbers like that, there?s little wonder why high net worth individuals and institutions have increasingly turned to hedge funds over the past several years.

        The best performing hedge fund strategies for 2002 were U.S. Short Selling, Offshore Short Selling and U.S. Emerging Markets, which posted net gains of 32.1%, 25.9% and 11.2%. For fourth quarter 2002, U.S. hedge funds specializing in the Media/Communications sector led with an average 14.5% net gain. They were followed by U.S. Macro funds, with an average 11.7% net gain, and Offshore Emerging Markets funds, with an average 6.3% net return. For December, the best performing strategies were U.S. Short Selling, Offshore Short Selling and U.S. Macro, which had net returns of 5.2%, 4.7% and 4.3%, respectively.