NEW YORK (CNN/Money) - Hedge funds have snapped their losing streak: July was the best month hedge funds have seen all year, with the major indexes that track them posting positive numbers across the board.

With July's gains, hedge funds can now claim three consecutive months in the black.

The average hedge fund that goes both long and short on stocks gained 2.1 percent in July, according to the S&P Hedge Fund Index.

Some of the industry's top long/short equity managers easily outperformed that figure. Stephen Mandel's Lone Cypress, managed through his firm Lone Pine Capital, gained 2.2% in July and is up 16.9% for the year. David Einhorn's Greenlight Capital Offshore posted a hefty 5.4% gain in July and has returned about 12.3% for the year. Art Samberg's Pequot International Fund returned 4.3% in July and 5.8% for the year through July.

Those results trailed the S&P 500 stock index, which gained 3.6 percent in July. But year-to-date, long/short equity hedge funds have outperformed, returning 3.2 percent versus 1.8 percent for the S&P 500.

Long/short equity hedge funds are not supposed to be correlated to major market indexes, but have increasingly tracked the S&P 500, according to Justin Dew, senior hedge fund analyst at Standard & Poor's.

"Five years ago, the strategy was to pick the top 10 stocks you like and swing for the fence," Dew said. "But do it in a way that if you were wrong you didn't lose your shirt (meaning you have short positions to protect you)...that's not what it looks like now."

Dew said he would not expect long/short managers to outperform strongly in a strong bull market but would expect them to make money or preserve capital in a bad market. In theory, hedge funds are designed to produce "absolute" returns, or positive returns regardless of whether the overall market is up or down.

Merrill Lynch's index of long/short funds was up 2.2 percent in July. Merrill's managed futures index finished lowest, with a 1.3 percent decline for the month.

Hedge fund performance is difficult to track, since managers are not required to post their numbers and it is unclear how many hedge funds exist. Hedge fund indexes are composed of funds whose managers voluntarily list the performance of the funds they manage.

Dew said that year to date, long/short equity hedge funds have outperformed the S&P 500 while taking on less risk.

"What (long/short equity hedge funds) have done so well in the past couple months is not only pick the right stocks on positive side but also not have their short book drag down performance," he said.

Robert Schulman, chief executive of Rye, N.Y.-based Tremont Capital Management, a hedge fund investment and research firm, said an increase in stock market volatility, coupled with a drop in correlation between similar assets, combined to give hedge funds what appears to be the best month they have seen since November 2004.

"The hedge fund business has put together two importantly good months," he said. "The headwind against hedge funds has shifted around and given us a little tailwind."

Said Ben Borstein, who runs three funds through Newport Beach, Calif.-based Prospero Capital Management, "I think it's a little easier to make money in the summer months; there's not a lot of volume, so sometimes stocks really move to their true value," he said. "But on the other side, some people say there's no liquidity, so it's hard to make money."

Prospero's Beaumont fund, which is a long/short equity fund with more long positions than short positions, gained about 4.1 percent after fees in July, while his Curan fund, with an equal number of long and short positions, finished the month up about 2.5 percent after fees.

Managed futures funds did not fare as well; rising interest rates hurt many funds that had been long bonds and short interest rates, according to S&P's Dew.

But event driven funds, in which managers anticipate and seek to profit from corporate events such as mergers or restructurings, continued their solid performance, with the S&P Event-Driven Index gaining 1.5 percent in July. Some post-bankruptcy restructurings of the past two years finally bore fruit in July, while a number of merger announcements also contributed to the gain.

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