July 8 (Bloomberg) -- Citadel Investment Group LLC’s main funds gained 9.5 percent in June as corporate bonds rose, beating an industry indicator that was little changed.

The Wellington and Kensington funds returned 31 percent in the first six months of the year, said a person familiar with the results who asked not to be named because the information is private. Chicago-based Citadel, founded by Ken Griffin, manages $12 billion.

Hedge funds grew an average of less than 1 percent in June, according to Hedge Fund Research Inc., which compiles indexes to track industry performance. Its Weighted Composite Index rose 9.4 percent for the first six months of the year.

“Despite the strong performance, managers still feel there is opportunity to monetize some of the dislocation that occurred over last four months of 2008,” Kenneth Heinz, president of Chicago-based Hedge Fund Research, said in an interview today.

Devon Spurgeon, a spokeswoman for Citadel, declined to comment on the funds’ performance.

Funds that trade corporate bonds led June’s advance, climbing 3.2 percent. Corporate bonds had a total return of 11 percent from April through June, their best quarterly performance in almost 27 years, according to the Merrill Lynch U.S. Corporate Master Index. The securities returned 3 percent last month, the Merrill data show. They gained 17 percent in the third quarter of 1982.

Convertible Bonds

Funds that trade convertible bonds performed the best, gaining 30 percent by the end of June, according to Hedge Fund Research.

Convertibles allow investors to exchange bonds for stock when shares of the issuers reach preset levels. Hedge funds typically invest in convertible bonds and then sell short the stock, seeking to profit from price differences between the two securities. Shorting involves selling a security an investor doesn’t own and has borrowed in anticipation of making a profit when the price falls.

This year’s hedge-fund gains followed an average decline of 19 percent last year, the worst return since Hedge Fund Research started tracking data in 1990. The industry declined by 1,200 funds from 9,050 in the middle of last year, the company said.

Citadel’s funds tumbled 55 percent in 2008 and will have to climb an additional 70 percent before it can charge its clients performance fees again. The firm suspended withdrawals last year from Wellington and Kensington. The firm said in February it will decide each quarter whether to make payments to investors seeking redemptions. It hasn’t yet paid money to those clients.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

To contact the reporter on this story: Cristina Alesci in New York at Calesci2@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net.

Last Updated: July 8, 2009 17:42 EDT