NICE, France (HedgeWorld.com)–Given the dominance of distressed securities funds over the last few months of the year and in view of their 2004 finish with the best annualized return among the 13 strategies tracked by the Edhec Alternative Indexes, it’s hard to imagine distressed managers could have done any better.

But according to Edhec’s preliminary figures for December, they could have.

The estimates, compiled by Edhec Business School’s Risk and Asset Management Research Center, showed distressed managers earned the second-best returns for December at 2.5%. Only event-driven managers did better last month, earning 2.6%. But distressed ended the year on top, generating a 17.7% return for the 12 months ended Dec. 31.

According to the Edhec analysis, the results would have been even better but for the poor performance of small-cap stocks during the month. On the plus side, distressed managers were able to take advantage of positive overall stock market performance and low levels of volatility.

Although event-driven managers earned top returns for December, they finished the year third in terms of annualized returns behind distressed and emerging markets managers. In December, low credit spreads and low implied volatility combined with positive equity market returns to the benefit of event-driven managers. For the year, event driven returned 12.62%, according to the Edhec indexes estimates.

Emerging markets posted a return of 2.29% in December, helped by positive overall equity market returns and low implied volatility, according to Edhec’s analysis. For the year, emerging markets earned 14.62%, according to Edhec officials.

Only short sellers lost money in 2004, according to the Edhec estimates. Short-selling strategies chalked up negative 3.98% in 2004 and were not helped by a December return of negative 3.22%. The results were not surprising, however, given that short-selling strategies depend on poor equity market returns. Equity markets in the latter part of the year posted positive numbers.

Commodity trading advisers lost money in December and were the only strategy other than short sellers to do so. But CTA managers still managed to post positive returns for the year, according to Edhec. CTA Global strategies lost 0.52% in December and finished the year up 4.64%.

Other strategies–convertible arbitrage, equity market neutral, fixed-income arbitrage, funds of funds, global macro, long/short equity, merger arbitrage and relative value–all posted positive returns for December ranging from 0.39% (convertible arbitrage) to 1.64% (long/short equity). Annualized returns included convertible arbitrage’s relatively flat 0.93% return, long/short equity’s 8.47% return and fixed-income arbitrage’s 6.18% return.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.