December was an up month for all six hedge fund strategies covered by Dow Jones Hedge Fund Indexes. Five of the six strategies posted gains in 2005.

With net-of-fees returns of 6.50% and 6.48%, event driven and distressed securities were the top two performing strategies for the year. For the distressed securities benchmark, 2005 also marked the fourth consecutive year that the strategy posted gains – which means the benchmark has been up in every year since its inception in January 2002. The event driven benchmark ended 2002, its first year of existence, in a drawdown of nearly 10%, but since then has posted gains in 2003 and 2004 and reached a new high water mark in 2005. The performance of the merger arbitrage benchmark was similar – a down year in 2002 followed by three years of gains – most recently a net-of-fee gain of 2.91% in 2005.

On the other hand, 2005 was the first year since its inception in January 2002 that the convertible arbitrage benchmark did not attain a new high water mark. The benchmark posted strong gains in 2002 and 2003 followed by a small but positive return in 2004. In 2005 the strategy declined 5.56% on a net-of-fees basis.

Dow Jones Hedge Fund Indexes started measuring the performance of the equity long/short (U.S.) strategy in November 2004, so 2005 was the first calendar-year return, which was positive 3.07%, net of fees. Equity market neutral has a longer history (back to July 2003), and with a 2005 net-of-fee return of 1.73% the strategy posted small but positive gains in both calendar years of its existence.

Equities & Fixed Income

On a float-adjusted basis, the Dow Jones Wilshire 5000 gained 0.14% (0.10% on a full-cap basis) in December, increasing full-year gains of the domestic broad equity markets to 6.38% (6.32% on a full-cap basis). The index has posted positive returns in three of the past four years; the index’s most recent negative year was in 2002.

The fixed income asset class as measured by the Dow Jones Corporate Bond Index returned 1.23%, pushing its 2005 return to 1.34%. The index has been up in the past four years.

The Dow Jones World Total Market Index rose 2.68% in December, increasing the cumulative gains of the world equity markets to 11.67% for 2005. The index has posted positive returns in three of the past four years; this index’s most recent negative year also was 2002.

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