NEW YORK (CNN/Money.com) - A busy month for the business world -- including high-profile deals, volatility in the Japanese stock market and a continuing oil boom -- created investment opportunities for hedge funds of all stripes in January, people in the business say. Hedge-fund managers, who suffered through a difficult 2005, say it's a promising start to the year.

"It's almost as if there was a year of events in one month," said Philip Broenniman, managing partner of New York-based hedge fund Cadence Investment Partners, LLC. "The Guidant close, continued consolidation in the steel industry and continued performance in the oil patch has done little to dampen returns for funds across the board."

Through Jan. 23, the average hedge fund is up 1.17 percent, according to the Merrill Lynch Diversified Hedge Fund Index, which tracks the performance of hedge funds. Hedge funds are private investment pools that employ a wide variety of investment techniques and are open only to institutions and wealthy individuals. The S&P was up 1.24 percent over the same period.

Event-driven funds, in which managers anticipate and seek to profit from corporate events such as mergers or restructurings, posted gains of 1.68 percent through last Friday, thanks to a spate of deals and events including Boston Scientific's winning bid for medical devices maker Guidant.

Shareholder activist funds may also see gains from events including the purchase of the Fairmont Hotels & Resorts chain by investment firm Colony Capital and Saudi Prince Alwaleed bin Talal, announced Monday.

And No. 1 steel maker Mittal Steel's hostile takeover bid for No. 2 steel maker Acelor, launched Friday, may also create opportunities.

David Smith, founder of Santa Monica, Calif.-based Coast Asset Management, which runs single-strategy hedge funds and funds of hedge funds, said January will probably be a good month for overall hedge-fund performance when final numbers are tallied.

"Credit spreads have narrowed, and stocks are up," he said. "Usually, those two variables have a fair amount to do with what hedge funds in general will return."

Another important variable: a rise in volatility in both the equity and fixed income markets, which hedge funds view as a positive. Volatility in the equity markets rose mid-month, thanks to macroeconomic factors such as lower-than-expected fourth-quarter GDP growth, volatility in oil markets, and geopolitical events in South America and the Middle East, Smith said.

Overseas, volatility in the Japanese stock market during the month of January may have benefited hedge funds. These funds took advantage of a broad selloff in the Japanese equity market that followed a two-day period of 6 percent losses, said Peter Borish, manager of Twinfields Capital, a fund that trades according to broad economic trends around the world, a strategy known as global macro.

Top performing strategies for the month include emerging markets, which invest in the debt and equities of emerging economies.

Emerging market hedge funds' January performance is "just phenomenal," thanks to big economic gains in Latin America in particular, said Larry Smith, chief investment officer of global macro fund Third Wave Global Investors. And that's following a strong 2005, when these funds posted gains of more than 20 percent, according to Chicago-based hedge fund tracker Hedge Fund Research, which follows the performance of 1,800 hedge funds.

Similar factors appear to have boosted the performance of global macro funds. Mary Ann Bartels, an equity trading strategist with Merrill Lynch, said these funds also had a strong month, gaining 2.4 percent through Jan. 23, thanks to long equity holdings.

Long/short equity, in which managers take long positions in stocks and sell short individual stocks or sectors they feel are overvalued, had a solid month. Merrill Lynch estimated the U.S.-only long/short funds in its index were up 1.92 percent through Jan. 23.

This is in part because hedge funds weren't hedging as much as usual, according to Bartels, who noted that many managers were more long equity than usual -- a trend that continued from last year, when many hedge funds had a correlation of 80 percent to the broader markets.

Cadence's Broenniman said shorting stocks proved frustrating in January, because some stocks are rising above their fair valuations due to the possibility they might receive funding from private equity firms.

"The threat of a company going private keeps its stock buoyant," said Broenniman.

For hedge funds, 2005 was a tough year for performance, judging by numerous hedge fund indexes.

Chicago-based hedge fund tracker Hedge Fund Research's HFRI Composite Index, which tracks the performance of about 1,800 hedge funds, returned 9.35 percent for all of 2005, compared with the S&P 500's return of 3 percent for the year. Although the HFR index outperformed the S&P 500's return, other hedge fund indexes posted gains lower than the S&P. The widely varying numbers reflect the notorious difficulty of tracking hedge funds, since these funds are private and frequently decline to disclose performance.

Despite a rough October that took a big chunk out of many managers' gains for the year, hedge funds managed to produce gains of 2.13 percent during the fourth quarter vs. 1.59 percent for the S&P.

Also, convertible arbitrage funds, in which managers buy convertible bonds and short the underlying stock, took a drumming this year, particularly during April and May of 2005. The once-dependable strategy faltered when huge losses forced a handful of big funds to close.

Emerging markets funds topped the HFR index for the year. Convertible arbitrage funds, in which managers buy convertible bonds and short the underlying stock, finished the year down 1.94 percent, making it the worst-performing hedge fund strategy in the index.

Hedge funds also had a more difficult time raising money last year than they have in several years.

Hedge funds posted their first quarterly loss of assets in 10 years, according to Chicago-based hedge fund tracker Hedge Fund Research. Hedge funds saw $824 million of assets leave their coffers during the quarter. For the year, hedge funds generated just under $47 billion in new net assets, raising the industry total to more than $1.1 trillion.

That's considerably less than hedge funds raised in previous years. In 2004, hedge funds brought in $73.6 billion in net new flows and gained $70.6 billion in new assets in 2003, according to HFR.

"Performance has been difficult on the year, and I think two years of relatively similar performance clearly has had some investors head for the sidelines to retrench and potentially rethink some of their strategies," said Joshua Rosenberg, president of HFR.

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