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Early estimates show the HFN Hedge Fund Aggregate Average, an equal weighted average of all single manager hedge funds and CTA/managed futures products in the database, was up by 0.89 per cent for December, bringing the full-year performance to 10.85 per cent. The index draws on a database of more than 7,900 hedge funds, funds of funds and managed futures products.

HFN says positive hedge fund returns in December came in a very a difficult environment that itself defined the year as a whole for hedge funds, with positive performance amid equity market instability. Throughout 2007, aggregate hedge fund performance was the strongest by comparison with equity markets since 2002, outperforming the S&P 500 Total Return Index by more than 500 basis points.

During much of the bull market run from 2003 to 2006, hedge fund strategies took heat for underperforming equities, but in the two years in which hedge funds outperformed equity markets, 2005 and 2007, they did so by a cumulative 9.7 per cent - demonstrating, HFN says, that hedge funds have again proven a highly useful tool during periods of equity volatility. Over the past three years, hedge funds delivered a return of 35.31 per cent, compared with 28.16 per cent for the S&P 500 TR.

In December, HFN says, many funds appear to have been able to take advantage of strong moves in energy and precious metal prices, with CTA managers benefiting most. The HFN CTA/Managed Futures Average gained 2.09 per cent in December and finished the year up 12.70 per cent, almost double the best annual return for CTAs since 2003 and practically equal to the strategy's cumulative returns for three previous years combined.

Early results for energy sector hedge funds indicate an average return of up 3.81 per cent in December, taking the HFN Energy Sector Average return for the year to 17.53 per cent. Many had predicted oil prices to fall or remain flat in 2007, but as they approached USD100 a barrel toward the end of the year, hedge funds took advantage.

In the last four months of 2007, energy sector hedge funds returned 8.19 per cent. The oil bull run made energy hedge funds the second best performing specialty sector, lagging only emerging markets, in the past five years - a period when the average energy sector hedge fund was up 166.92 per cent, a compound average annual return of 21.69 per cent.

Emerging markets produced the best returns in 2007, led by funds focusing on China and India. Despite significant volatility, emerging market hedge funds returns were positive in December, producing an average increase of 0.94 per cent.

The HFN Emerging Markets Average ended the year up 20.83 per cent, the third year running it has delivered more than 20 per cent. Since 2001, the average emerging market hedge fund has returned 320.76 per cent, a compound average annual return of 22.79 per cent.

Like managed futures, macro funds also enjoyed a renaissance in 2007 aided by strong moves in global currency and interest rate markets. The HFN Macro Average returned 1.66 per cent in December and 12.40 per cent for the full year, the strategy's best year since 2003 and the second best since 1999. In a testament to the average manager's ability to judge global trends, macro funds appeared to position themselves correctly as credit markets entered their worst stretch in the second half of the year.

During the final four months of 2007, when global central banks were taking unprecedented measures to provide liquidity, macro funds returned almost 7 per cent, pushing the strategy into the top five performers for the period.

Long/short equity funds gained 0.68 per cent in December and the HFN Long/Short Equity Average was up 11.71 per cent for 2007. Long/short equity funds have best demonstrated the advantage enjoyed by hedge funds over equity markets not only in 2007 but over the past three years, producing a cumulative return of 40.02 per cent while the S&P Global 1200 was up 37.72 per cent and the S&P 500 TR by just 28.20 per cent.

Historically, this outperformance has increased in times of equity market stress. In the two-year period encompassing 2001 and 2002, the average long/short equity fund was up 5.50 per cent while the S&P 500 TR and Global 1200 were losing 31.40 per cent and 33.36 per cent respectively.

Not every strategy produced solid results in 2007 as extremely difficult credit markets took their toll. Distressed hedge funds were positive in December, up 0.25 per cent, but gained just 6.25 per cent in 2007, the worst year for the strategy since 2000. During the most difficult stretches for credit markets, August and November, the average distressed fund declined by 1.49 and 2.06 per cent respectively.

Financial sector hedge funds were hardest hit and the only hedge fund sector in negative territory for the year. With only a few funds reporting December performance, an indication that results may slip further, the average finance sector fund was up 2.11 per cent for the month, but the HFN Finance Sector Average declined 2.86 per cent during 2007, the first negative year for such funds since 1999 and the first negative annual performance any hedge fund strategy, short biased funds aside, since convertible arbitrage in 2005.

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