Returns for hedge funds suffered worse than markets did in a tumultuous August, according to HedgeFund.net.

Early estimates show the HFN hedge fund aggregate average was -1.3% in August. This represents an equal weighted average of all single manager hedge funds and CTA/managed futures products in the HedgeFund.net database. The decrease was the largest since May 2006 and was the first month since May 2007 that the average hedge fund underperformed equity markets.

“Unlike previous months, when equity markets fell and hedge funds outperformed, the environment in August proved more treacherous for managers,” HFN says. “Although major U.S. equity markets ended August positive and European markets rallied to month end, the big drops and volatility during the month combined with widening credit spreads resulted in the majority of hedge fund strategies being negative in August.”

It notes that returns were worst in strategies that had benefited from large appetites for risk driven by high liquidity and lax credit. Emerging-market hedge funds had their second weakest month since September 2001 returning an average of -3.6% in August.

The HFN fixed-income arbitrage average — perhaps the most representative benchmark of the difficulties caused by the global credit squeeze — experienced its worst month since October 1998; it slid 2.39%.

Energy sector hedge funds ended the month down 4.7%. Also, long only and long/short equity managers both experienced their worst months since May 2006, it says, with the HFN long only average down 3.37% in August, and the HFN long/short equity average off by 1.39%.

August was not painful for every hedge fund strategy, HFN notes. It adds that managers running option strategies benefited from the increase in volatility, returning an average of 1.4% in August. Short biased managers produced positive returns for the third straight month, up 1.04% in August.

Despite the pain inflicted on most strategies in August, for the year to date, through August, the average hedge fund is up 6.3%.