Hedge funds added 3.25% in September according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is now up 20.05% in 2009.

“This month’s gain of 3.25 per cent is the strongest September return since 1997, when hedge funds rose 4.05 per cent,” says Sol Waksman, founder and president of BarclayHedge. “The rally in global equity prices continued to gain steam in October. Although the S&P 500 Index increased 3.73 per cent, it was eclipsed by the performance of the MSCI BRIC Index which gained 10.14 per cent.

“Further confirmation of increased investor willingness to take on more risk in search of higher yields can be found in the fixed income sector where prices for lower rated credits continued to increase at a faster rate than investment grade. Prices for investment grade Aa rated credits increased 1.26 per cent in October, while B rated US High Yield rallied 4.50 per cent.”

Overall, 16 of Barclay’s 18 hedge fund indices gained ground in September, led by the Barclay Emerging Markets Index, which jumped 5.36%. The Distressed Securities Index gained 4.88%, Convertible Arbitrage was up 4.47%, Equity Long Bias gained 4.00%, the Event Driven Index was up 3.67%, and the Technology Index added 3.44%.

“Stock markets in Asia, South America, Eastern Europe and the Middle East are performing well at the moment, giving an edge to hedge fund managers who focus on these emerging markets,” adds Waksman.

Through September, 13 of Barclay’s 18 hedge fund indices have double-digit returns in 2009. The Convertible Arbitrage Index leads the way with a 47.03% gain year-to-date, followed by Emerging Markets, which is up 36.81%. The Equity Long Bias Index has gained 25.30%, Healthcare & Biotechnology is up 25.11%, the Event Driven Index has gained 24.51%, Distressed Securities are up 22.58%, and Multi-Strategy has gained 21.13%.

“Market conditions have been highly favorable for arbitrageurs this year, pushing the Barclay Convertible Arbitrage Index into record territory,” says Waksman. “This is turning out to be the best year for Convertible Arbitrage since we started tracking the sector in 1997.”

The Equity Short Bias Index dropped 2.79% in September, and is down 14.32% after three quarters.

“The stock market plunge in 2008 provided ideal conditions for short sellers, and the Equity Short Bias Index had a record year, gaining 40.91 percent,” says Waksman. “Now it appears the tide has turned. Shorting the market is the only losing hedge fund strategy thus far in 2009.”

The Barclay Fund of Funds Index gained 1.60% in September, and is up 8.68% year-to-date.