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Hedge funds are still trailing the market badly this year, except for the ones buying bitcoin

  • Hedge funds on average returned 3.5 percent on the year through May, according to Hedge Fund Research.
  • Funds added just half a percent in May, according to HFR.
  • Currency-focused funds, with a boost from bitcoin, are beating the market this year, according to the research firm.

Hedge funds on average returned just 3.5 percent this year through May, less than half the gain of the S&P 500, according to calculations from Hedge Fund Research.

The HFRI Fund Weighted Composite Index added half a percent in May, while the S&P 500 rose more than 1 percent. To their credit, it was the industry's seventh-straight month of gains.

There were two strategies that performed well in May and so far this year: technology and currencies. HFR says the FX funds did well because of exposure to digital currencies like bitcoin.

"Macro was led by the HFRI Macro: Currency Index, which vaulted +3.5 percent, the strongest month return since inception, bringing YTD performance to +8.2 percent. In addition to contributions from Euro, Swiss Franc, New Zealand Dollar and Korean Won, the Currency Index also had strong contributions from exposure to digital currencies," the HFR report said.

Bitcoin hit a record May and posted another all-time high this week. The digital currency has nearly tripled this year on strong demand out of Asia and hopes its technology will revolutionize banking and lending.

Tech hedge funds are riding the "FANG" stocks and Apple to big advances, posting a 2.7 percent gain on average in May to bring their year-to-date return to 9.1 percent, according to HFR.

Most other hedge fund strategies trailed the market in May and are underperforming the market so far in 2017, according to the HFR report.

The so-called smart money is running out of time to prove they can beat an index fund in the eighth year of a bull market where investor money has flooded into passive strategies and out of active ones like hedge funds.

HFR believes hedge funds may get a chance to prove their worth if volatility picks up in the second half of the year.

"As a result, the thematic drivers of performance for 2H17 have shifted to include not only the Trump and Yellen trades, but also the volatility reversal trade and the increased risk associated with terrorism and cybersecurity," said Kenneth J. Heinz, president of HFR, in the report. "Managers positioned tactically long and short which are able to navigate both rising and falling volatility market cycles are likely to lead industry performance in 2H17."

Watch: Mark Cuban says bitcoin in a bubble