Hedge funds fell in February, giving back January's gains and reversing two straight months of small advances as the stock markets continued to swoon, according to data from the hedge fund adviser Hennessee Group LLC.

Another indicator of the funds' performance, the Credit Suisse/Tremont Hedge Fund Index, was down 0.5% with 59% of assets reporting and was likely to show a decline when all assets have reported.

Hedge funds are coming off their worst year on record, as the financial crisis spurred investors to convert holdings into cash and some funds faced unexpected disruptions to their trading strategies, including temporary bans on short-selling stock.

The Hennessee Hedge Fund Index fell 0.8% in February but still trounced the three main U.S. stock markets, which fell 6% to 12%.

Hennessee's short-biased index rose 3.8% in February, making it the best performer.

Credit Suisse/Tremont said hedge funds could capitalize on market swings in February amid volatility in global stock markets fueled by soaring losses at financial companies. It said many funds took short positions, acting defensively with reduced exposure to stock markets.

Credit Suisse said markets could stabilize by midyear and post a tepid recovery late this year or early next, driven by President Obama's $787 billion economic stimulus plan and other initiatives.

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