Hedge funds delivered excellent returns of nearly 3% in December to end the year on a high note. The Eurekahedge Hedge Fund Index finished 2010 with gains of 10.86%. Growing optimism about the US economy led to rallies in underlying markets – the MSCI World Index was up 5.55%, with 2010 returns of 7.83%.

Below are the highlights for December:

• Hedge funds posted double-digit growth in 2010 and outperformed underlying markets – up 10.86% for the year.
  
• December was the 6th consecutive month of back-to-back positive returns for hedge funds.
  
• Japanese hedge funds posted best annual return in 5 years, up 6.79% in 2010.
  
• North American hedge funds witnessed the best December returns since 2000, up 3.48%.
  
• North America was the best performing hedge fund region in 2010 up 13.63% in the year.
  
• Hedge funds attracted US$70 billion through net positive asset flows in 2010 – total size of industry exceeded US$1.65 trillion for the first time since September 2008.
  

In terms of regional mandates, North American managers were the best performers in December as the Eurekahedge North American Hedge Fund Index gained 3.48%. Managers maintained a net long bias throughout the month, which was marked by increased risk appetite, leading to a strong market rally – the S&P 500 was up 6.53% in December. Improving economic indicators and better-than-expected earnings estimates drove up investor sentiment, with equities and high yields making significant gains. North American hedge funds were also the best performers as a whole, amongst all major hedge fund regions for 2010, ending the year with gains of 13.63%, outperforming the S&P 500 which was up 12.78%.

All other regional hedge funds ended December with positive returns, with major regions outperforming underlying markets in the 2010 return figure. Japanese hedge funds finished the year with gains of 6.79% – their best performance in five years. This return is especially significant as the Japanese market witnessed significant volatility during the year – the Nikkei was down 3.01% in 2010. Asia ex-Japan managers posted another year of double-digit growth, gaining 10.42%, while the MSCI Asia Pacific Ex Japan Index3 was up 8.13% over the same period.

All strategies ended December in positive territory, with CTA/managed futures funds delivering the best performance, up 4.71%. A weakening US dollar and strong outlook for 2011 drove up the prices of commodity contracts, with several soft commodities reaching record highs. Energy prices rose to their highest level since October 2008, while gold also reached a new record high. Gains in equity markets were effectively captured by long/short equity and event driven managers, up 2.87% and 3.71%, respectively, while distressed debt hedge funds also delivered excellent gains of 2.57%. The best performing strategy for 2010 was distressed debt, with managers gaining 21.31% for the year and outperforming the BAML High Yield Master II Index, which was up 15.19% in the year.