Hedge funds claim that they can make money in all markets and deliver returns with less volatility than traditional assets over the medium term, but this can be a hard sell when stock markets are rising so quickly.
"Arguably in the long term it's fine but it doesn't feel good when equity markets are up 20 percent or more," said Anthony Lawler, who invests in hedge funds at asset manager GAM.
Winners and losers
Still, some funds outperformed.
Lansdowne Partners' $10 billion long-short equity fund was up 33.3 percent by mid-December, helped by gains in one of its largest holdings, Lloyds Banking Group, while Egerton Capital's main fund was 23.5 percent ahead, data seen by Reuters shows.
Credit-focused funds also beat traditional investments, with funds trading high-yield debt returning 8 to 10 percent, investors familiar with the sector said.
Elsewhere, global macro managers, who bet on shifts in the global economy and are among the most-celebrated in the industry, struggled to get to grips with central bank policy.
Read more: No letup on risk for hedge funds this December)
Funds who bet Japan's monetary stimulus would send the yen sliding, like those run by Caxton Associates and Moore Capital, generated double-digit gains but others found it tough to make money from their usual bets on Treasuries as the United States moved towards tapering its $85 billion a month asset-buying program.
The $16 billion BlueCrest Capital International fund is flat while Brevan Howard - the largest hedge fund manager in Europe - had only made 2.2 percent in its Master fund by the end of November.
Meanwhile computer-driven funds, staffed by mathematicians who employ complex algorithms to try and outwit markets, had another down year amid a lack of discernible trends in markets.
BlueTrend - part of BlueCrest Capital - fell 8.7 percent during the first 11 months of 2013. Aspect Capital lost out too and was down 6.5 percent by mid-December, while Cantab Capital suffered a far-bigger 29 percent plunge in its main fund.
With traders failing to make money as volatility fell and price moves in key oil and copper markets stayed small, commodity funds also dropped for the third year in a row.
While the average commodity fund is down 4.3 percent Newedge data shows, one of the biggest and best-known funds - Clive Capital - decided to call it a day in September and closed.
(Read more: This could be the next big thing for hedge funds)
Lawler at GAM said the dominance of machine traders in markets had made it particularly tough for other commodity managers, and he remained underweight in the sector.
New money keeps on coming
Despite the relatively poor performance, investors continue to put more money into hedge funds.
Total net inflows by the end of November topped $71 billion, almost double last year, eVestment said in a report this week. Combined with performance gains, this has raised industry assets to $2.8 trillion, 3 percent below its all-time high.
Institutional investors are fuelling the inflows, believing that when markets skid hedge funds will offer them the best protection from losses on their stock and bond holdings.
"Hedge funds need a year when you get more differentiation across markets. Maybe next year will bring that, but if funds still can't perform better, then what can managers say?," Botero said.