Despite overall gains throughout the first four months of the year, it was “mostly downhill” for hedge funds for the remainder of 2011.

“Dramatic volatility in global equity markets created a significant challenge for fund managers throughout 2011, evidenced by the fact that 60 per cent of funds reported a loss for the year,” said Sol Waksman, founder and president of BarclayHedge.

The US-based fund tracker and analyst BarclayHedge said that this type of “see-saw” activity across markets presents a challenge for managers to navigate successfully.

The volatility seen within global equity markets resulted in an underperformance by hedge funds of 7.39 per cent compared to the S&P 500, which was the worst performance since the 10.69 per cent disparity in  2003.

Overall, the Barclay Emerging Markets Index lost 13.02 per cent last year while equity long bias was down 9.38 per cent. Pacific Rim equities posted a loss of 7.95 per cent as European equities were down 6.44 per cent and the distressed securities index lost 6.32 per cent.

"Although emerging markets was the poorest performer of the sectors that we track, investors continue to be attracted to the strategy, as evidenced by inflows of $7.6 billion in the past 12 months,” said Waksman.

Meanwhile, equity short bias was the strongest performing hedge fund strategy last year, with a total return of 7.70 per cent. Fixed income arbitrage had gained 4.54 per cent at the end of the year and merger arbitrage was up 3.99 per cent.

The Barclay Fund of Funds Index was down 0.49 per cent in December, and lost 6.14 per cent in 2011.

“Fixed income funds saw investor inflows of $18 billion in the past 12 months even as prognosticators fretted that the three-year rally was starting to appear a bit long in the tooth,” added Waksman.