Hedge funds largely lagged the major stock market indexes in August, said Hennessee Group, yet the industry chalked up another month of gains after the record beating it took in 2008.

The Hennessee Hedge Fund Index rose 1.85% last month, underperforming the Dow Jones Industrial Average and the S&P 500 index, the company said Tuesday.

But it edged by the Nasdaq Composite Index, which logged a 1.54% gain last month and is the best performing of the three broad indexes, with a 27% jump this year.

Year-to-date, the Hennessee index is up 17%, better than the Dow or the S&P 500.

"There was good economic news released in August, specifically housing and manufacturing data," said Hennessee co-founder Charles Gradante. "However, our expectations for future growth and a V-shaped recovery are tempered. Government spending continues to drive demand, while the private sector has been largely absent. This dynamic is not sustainable."

Hennessee managing principal Lee Hennessee said it was not a surprise to see hedge funds post smaller gains than stocks, "given their short portfolios and hedges."

The Financial Equities Index had the biggest rise among the sectors tracked by Hennessee, reporting a 4.3% gain. Financial stocks have been among the market's leaders since their March lows.

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