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Hedge funds mostly missed out on the Trump rally

Stocks had a surprisingly strong month in November, but for hedge funds, it was more of the same.

On the upside, the industry, broadly speaking posted gains for the month. The HFRI Fund Weighted Composite Index, a benchmark for performance, rose 0.9 percent on the month, bringing the year-to-date gain up to 4.6 percent.

The downside, though, is a familiar refrain.

Despite their comparably high fees, hedge funds continue to underperform basic market indexes — and by a pretty wide margin. The S&P 500 for the month rose 3.7 percent in terms of total return terms, and was up 9.8 percent for the year. The market index hit a fresh all-time high Thursday morning

The driver of equity outperformance for the month was an injection of optimism that followed Donald Trump's stunning upset in the presidential race. While much of Wall street had been anticipating a market plunge in the event that the Republican won, just the opposite happened.

Donald Trump
Getty Images
Donald Trump

Trump's victory momentum spilled over into hedge funds.

"Hedge funds advanced to a near-record level in November on the surprise Trump victory despite the sharp rise in yields and U.S. dollar strength, as U.S. equities also rallied to record highs on expectations of a new administration focused on economic growth and reduced regulation," Kenneth J. Heinz, president of industry tracker HFR, said in a statement.

Indeed, the HFR benchmark is at 12,841.95, the highest since May 2015 and the second-best ever.

So-called event-driven strategies have been a key to the gains that hedge funds have been able to register this year. The strategy essentially looks to capitalize on mispriced stocks in mergers and acquisitions deals.

In a year when M&A has tailed off, the strategy is nonetheless working. Deals totaled $1.61 trillion through November, a pace that would fall behind 2015's total of $2.05 trillion, according to S&P Global Market Intelligence.

However, event-driven funds gained 2.2 percent in November, bringing the year's return to 9.4 percent, according to HFR. M&A showed a noticeable post-election bump, with $132.7 billion worth of deals emerging.

The positive performance for the year has allowed the industry to grow in assets despite a continuing wave of investors pulling cash. Hedge fund assets are at $2.97 trillion, despite a net $51.4 billion in redemptions. The total assets figure represents a 2.5 percent gain over 2015.