Hedge funds finished the volatile first half with modest declines. The HFRI Fund Weighted Composite Index lost 0.81% in June, more than offsetting the gains in the first five months of the year to leave the index down 0.18% for the first half of 2010.

"After a quiescent first quarter, volatility increased significantly in the second quarter with concerns about sovereign credit risk, currency policy adjustment, economic and energy market impact of the environmental disaster and concerns about slowing growth in both developed and emerging economies contributing to declines in global equity markets, a powerful late-quarter rally in U.S. Treasury bonds and volatile directional moves in currency & commodity markets," the index's publisher, Hedge Fund Research, said in a press release Thursday.

Equity hedge funds posted the worst performance in the second quarter, with this sub-index declining 1.50% in June, bringing returns for the first half to -1.60%

Relative value arbitrage was the strongest area of industry performance, with the HFRI Relative Value (Total) Index gaining 0.40% for June and 3.66% for the first half. Hedge Fund Research aid fixed income exposure across sovereign, convertible, corporate and asset backed all posted gains in June, which were complemented by gains in volatility and MLP-focused strategies, where gains were driven by falling yields, increasing volatility and a sharp increase in natural gas.

The HFRI Macro (Total) Index declined by -0.23% in June, dropping year-to-date performance to -1.27%.

The HFRI Event Driven (Total) Index declined by -1.10%, trimming gains for the year to date to 2.43%.

The HFRI Emerging Markets (Total) Index posted a decline of -0.63% with gains in Latin America and Emerging Asia only partially offsetting declines in Russia and the Middle East.