Stocks weren't the best hedge fund strategy in 2013

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Bond investors post surprisingly good returns

Most of the talk in the hedge fund industry has been around two hot strategies this year. Those executed by stock-focused managers like Jeffrey Altman's Owl Creek Asset Management and Larry Robbins' Glenview Capital Management who rode the bull market to relatively easy gains. And those played out by outspoken activists like Dan Loeb's Third Point and Barry Rosenstein's JANA Partners who shook up boards—and sometimes each other.

But it was distressed investors, who usually bet on the bonds of beaten up or bankrupt companies, who produced the juiciest returns in 2013.

The Absolute Return Distressed Index—an average of the performance of more than 100 hedge funds who use the strategy—is up 13.28 percent through November. That's better than benchmarks for U.S. equity (12.50 percent); event driven or activists (12.02 percent); and global equity (11.33 percent), according to hedge fund news and data tracker Absolute Return.

Some of the best distressed funds over the year have been David Tepper's Appaloosa Management Palomino Fund (up 38.3 percent); John Paulson's Credit Opportunities Fund (up 20.08 percent through November); and Davidson Kempner's Distressed Opportunities Fund (up 18.28 percent), which is managed by Anthony Yoseloff, Avi Friedman and Conor Bastable. The performance figures are from a report by HSBC's Alternative Investment Group.

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