April 30 (Bloomberg) -- Hedge fund returns rebounded in April after starting the year with the worst performance in nearly two decades, according to early results from Hedge Fund Research Inc.

Overall hedge fund returns increased 1.5 percent for the month ended April 28, according to Chicago-based Hedge Fund Research's Global Hedge Fund Index, updated daily with a two-day delay. Funds dropped 2.46 percent in March and 3 percent in the first three months of the year, according to HFR's Weighted Composite Index.

Hedge funds, which can bet on gains or declines in security prices, benefited as stocks rose in April. The Standard & Poor's 500 Index gained 5.2 percent in April. Volatility eased from March, when it was the highest in five years.

``Clearly, April has seen some kind of relief from the unrelenting bad news we were seeing in the January through March period,'' said Paul Ross, head of Iveagh Asset Management, the investment arm of the Guinness family brewing fortune. ``April has been much calmer.''

The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, declined as much as 23 percent in April to the lowest since Dec. 26. The so-called VIX gauges the cost of insuring against declines in the S&P 500. It hit a five- year high on March 17.

Profitable strategies in April included so-called long-short equity investing, in which managers profit on both gains and declines in stock prices. HFR's equity hedge index rose 2.8 percent, erasing an equal decline in March.

`Staying Invested'

``There was definitely an element of fund managers staying invested and trying to take advantage of some of the opportunities we saw in the end of the first quarter,'' said Ken Heinz, president of HFR in Chicago, in an interview today. ``This matches what we've seen in fund flows; investors have put capital into equity hedge and other strategies that had declined in the first quarter.''

Macro funds, some of the best hedge fund performers in the first quarter, have ``given a little back in April,'' Ross said. HFR's macro index rose 0.15 percent through April 28, the third- worst performance of strategies tracked by HFR. Macro funds, which bet on everything from currencies to interest rates, are still the best performing category among eight strategies tracked by HFR, rising 9.5 percent so far this year.

More than a dozen hedge funds this year have shut, frozen redemptions or needed to seek outside capital.

Risk Fatigue

Peloton Partners LLP liquidated its largest fund after making wrong-way bets on mortgage securities, while JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP Chief John Meriwether, was hurt by swings in Japanese government bonds.

``The first quarter was so appalling to so many people that there's an element of risk-taking fatigue,'' said Ross, who invests a large portion of Iveagh's $800 million in assets with hedge funds. ``You're seeing people taking position but with nothing like the conviction they did in the first quarter.''

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net

Last Updated: April 30, 2008 11:57 EDT