Locally, Australian-based absolute return and hedge funds are continuing to outperform despite the rising market, which usually causes returns to drop back due to their short positions. A review of the hedge fund sector by Australian Fund Monitors (AFM) shows that the funds delivered an average of 2.69 % in May, beating the benchmark S&P/ASX 200 index by 1.70 %. It was the third month in a row of positive performance, taking returns for this year to 5.91 %

AFM's Chris Gosselin said the local share market was still down more than 30 per cent from its November 2007 peak, but hedge funds were only down about 12 per cent.

"Somehow, in spite of this, hedge funds are generally considered to be risky and speculative by a wide section of the community including the Australian Securities & Investments Commission who have placed them in the outside-the-flags category when considering investor risk," he said.

"Some funds have undoubtedly earned this reputation, but careful examination both when selecting an investment and analysing the subsequent results can save many a tear before bedtime."