Traders work on the trading floor at the New York Stock Exchange (NYSE) in New York City
Traders work on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 27, 2023. Reuters

Global hedge funds posted a solid 2.8% gain in January, but they missed out on the stellar rally that broader stock market indexes posted to start the year because the funds were mostly positioned for a continued bear market, data provider HFR said on Tuesday.

All four major hedge fund strategies ended the month higher, with equity hedge funds as the top gainer, up 4.24%, in a fresh start for a category that posted major losses in 2022.

Last year, hedge funds posted their worst performance since 2018, mainly dragged down by equities as portfolio managers struggled to place bets amid market turmoil.

"Equity hedge funds led strategy gains for the month, as investors positioned for an improved equity market environment in 2023, including a moderation of interest rate increases and slowing of generational inflation," HFR said in a presentation.

Still, the main Wall Street indexes far outperformed hedge funds. In January, the Nasdaq rose 10.7%, in its best January since 2011, while the S&P 500 advanced 6.18%.

Data from Goldman Sachs' prime brokerage showed that last month hedge funds massively abandoned their bets against stocks as they became too expensive amid a rally. Short covering reached its fastest pace since 2015, surpassing the speed seen during the meme stock frenzy.

Hedge funds' bearish bets prevented them from posting higher returns in January.

Event-driven strategies, which mostly bet on deals conclusions or failures and activism situations, were up 3.55% last month.

Relative value hedge funds, which trade price disparities, rose 1.95%, while macro hedge funds gained 0.26%, mainly dragged down by algorithm-driven and commodities strategies.