NEW YORK (CNNMoney.com) - Hedge funds bounced back last month after a rough October, posting stronger returns thanks to the stock market rally and other factors.

While major hedge fund indexes are still calculating final performance numbers for the month, investors and other people who track the industry say many funds are in the black this month, a sharp reversal from October.

Hedge funds, the private investment pools catering to wealthy investors and, increasingly, pension funds, have posted lackluster returns this year, though some types of funds have fared better than others.

Interest in the funds has exploded in recent years, as investors disappointed with traditional funds started looking for new places to invest. Just last year, the hedge fund industry took in $123 billion in new capital, up from $72 billion in 2003, according to Tremont.

Through Nov. 28, which excludes the last two trading days in the month, the Merrill Lynch Diversified Hedge Fund Index was up 0.89 percent for the month. Traditional long/short equity funds posted gains of 1.8 percent through Nov. 28, while funds that trade commodity futures gained 5.3 percent.

In November, a surge in the S&P 500 boosted long/short equity hedge funds, which take long positions in some stocks and hedge those positions by going short other stocks or sectors. The S&P 500 finished the month with a 3.52 percent gain.

"Volatility and interest rates are higher," said Robert Schulman, chief executive officer of Tremont Capital Management, a hedge fund investment and advisory firm. "Those are things that help hedge funds perform. We think people are going to be surprised with November numbers and numbers at the end of the year as well."

Jim Melcher, founder and principal of New York-based hedge fund Balestra Capital, said October was a short-term bottom and many funds have picked up thanks to the stock market rally. But he said some other trends reversed, also contributing to the gains.

"Japan has been doing well," he said, noting it helped to bet against the yen as well since the dollar was a strong currency play during the month.

"Housing stocks were pretty good until about three or four weeks ago. Though it seems clear the glory days of the residential housing market are over, (those stocks) rallied very sharply during November."

Tremont's Schulman said in addition to long/short equity, managers of distressed hedge funds, which invest in the securities of troubled companies, also performed well, as did some managers of funds that invest in emerging markets.

Convertible arbitrage funds, which bled assets and suffered sharp losses earlier this year, did not have a strong November but performed better than they have in some time, Schulman said. These funds exploit the pricing inefficiencies between convertible bonds and stock issued by the same company.

Sol Waksman, president of The Barclay Group, a hedge fund tracking and advisory firm, said factors that boosted futures funds included rising prices in both precious metals and industrial metals, as well as the strengthening dollar.

While many hedge funds posted positive results, short sellers, who bet stocks will fall, had a tough month.

That was in part because of the stock market rally.

But it also was from so-called "short squeezes," in which investors who have sold short are forced to buy when stocks rise in order to try to limit their losses.

"In general, these were stocks that you would have wanted to sell, but enough institutions piled in and were buying them and those who sold short had to rush to cover," Balestra's Melcher said. "That was a factor in November that seems to have died down" so far this month, he said.

That the rise in the stock market boosted hedge funds in November was no surprise to Cam Hui, equity trading strategist with Merrill Lynch. Hui said Merrill has found that hedge fund returns across various strategies, not just long/short equity, are becoming increasingly correlated to the stock market.

"Returns have (declined) a bit in the hedge fund space because there has been so much money going in," said Hui, adding that some managers have taken on more risk since it's getting harder to generate market-beating returns and once-profitable trades are now getting squeezed.

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