An index tracking hedge fund performance posted returns of 7.40% in 2016, marking the best result for the industry in three years and tripling gains made in 2015.

Despite a volatile start to the year which caused poor performance, Preqin says hedge funds rebounded to post positive returns in nine of the final 10 months of the year.

Overall, all leading strategies saw returns across 2016 according to the US data firm's All-Strategies Hedge Fund benchmark. 

Amy Bensted, head of hedge fund products at Preqin, said hedge funds were able to cast off performance struggles that hampered them in 2015.

“Fear over China’s economy in Q1, the Brexit vote at the end of Q2 and the US presidential election in Q4 drove the narrative in 2016.

"Although there were some high profile losses, the associated volatility created opportunities for hedge funds to produce significant returns for investors."

Looking ahead to 2017, Bensted reckons the continued consequences of these geo-political events are likely to remain key determinants of industry performance.

Despite the marked improvement in performance, she added that hedge fund managers will be aware that in recent years returns have "still fallen short of other alternative asset classes and public market indices".

This is especially pertinent in the wake of some high-profile investors eliminating or reducing hedge fund investments from their portfolio, such as giant state pension plans in New Jersey and Rhode Island.  

Specifically, Preqin data shows event driven strategies saw double-digit gains in 2016, returning 12.47% for the year.

This marked a sharp contrast from the previous year, when the funds were the only leading strategy to suffer losses (-0.78%).

According to Preqin’s size classifications, smaller hedge funds were able to generate the greatest returns in 2016.

North America-focused hedge funds returned 10.20% in 2016 after making gains of 0.45% in 2015

Funds focused on Europe (+2.89%) and the Asia-Pacific region (+1.68%) struggled through the year, but gains in Latin America saw emerging markets funds return 9.96%.

Funds of funds lose ground

Funds of hedge funds, investment companies that put money into hedge funds rather than investing in individual securities, recorded five months of losses in 2016, and only returned more than 1.00% in July. 

As such, annual returns for funds of hedge funds fell to -0.25% in 2016, their lowest performance year since 2011, when they saw losses of 3.98%.