You've likely heard of the January Effect, that stock market old saw that holds that stocks tend to rise in January because people sold in December to lock in capital losses and seek to reinvest for the new year. The Hennessee Group has noticed something of a corollary: A December Effect, which holds that stocks--and hedge funds-- tend to rise in December because investors hang onto stocks to defer paying taxes until the new year. 

The Hennessee Group recently took a look at the historical performance of the equity markets and hedge funds when we enter the final month of the year with positive year-to-date gains. Starting from 1995, the S&P 500 has generated positive returns through November in 10 calendar year periods and experienced additional gains in December in 70 percent of those cases. In comparison, hedge funds managed to generate gains in 9 of those through-November periods and rose in the subsequent December in all cases (see chart). 

When the S&P 500 is up through November, the index goes on to gain on average 2.1 percent in December and hedge funds go on to gain nearly 2 percent. So one could make the case that this effect is real. 

Which brings us to the point: Hedge funds may be on the verge of a spectacular year--perhaps the best in a decade. If the industry can achieve a 2 percent gain in December, which is entirely possible, it will end up with the highest average returns since 2003, reports Financial News.  

Even if funds dip a bit in the final month of the year, bucking the December Effect, it will still have been a good year. One in which they again thoroughly trounced the S&P 500. Warren Buffett is certainly losing his high-profile bet against a fund of hedge funds. For now anyway. - Jim