Hedge funds are on course to deliver their best first-half performance in a decade, as investors renew their faith in the sector in the wake of last year's calamitous losses.

Hedge funds worldwide returned 5.63 per cent to their investors in the year to last Thursday, according to Hedge Fund Research (HFR), the Chicago-based research firm that compiles daily statistics on performance.

Strategies that predict big directional market moves made profits of 12.52 per cent over the period as equity markets in Europe, the US and Asia-Pacific posted strong gains and liquidity gradually returned to the credit markets.

One hedge fund chief executive said last week that confidence in hedge funds returned in a single day in March, when the US Government unveiled the second strand of its Troubled Asset Relief Program (TARP).

The move sent a clear signal to funds that the American administration was acting to shore up the financial system, particulary its banks, and they returned to the market in droves, he said.

The multi-strategy funds at Citadel Investment Group, the US based manager, are understood to have gained around 30 per cent since January, having been down more than 50 per cent at one point last year.

Some London funds are known to have made stellar returns during the first half of the year.

Toscafund, the West End fund run by Martin Hughes, was most recently understood to have improved by more than 50 per cent since January. Tosca lost more than 60 per cent last year.

Energy hedge funds, convertible arbitrage and Asia investment funds have all posted strong gains this year, according to HFR.

Hedge fund investors lost an average of 18.9 per cent last year, according to HFR, as the sector plunged to its second annual loss and confidence in alternative asset management hit rock bottom.

The total funds under management, which at its peak topped $2 trillion, fell to below $1.5 trillion, as panic-stricken investors rushed to withdraw assets, HFR said.

Hedge fund executives complained last week that, despite the improving market, some funds continued to impose lock-ups and other restrictions, raising suspicions that they were acting to protect themselves rather than investors.

Investors were responding by refusing to place their assets with these funds, executives said.

The improved returns come as hedge funds marshall their forces against an EU regulatory crackdown, which they say is unfairly targeting them and their market.

At least eight hedge funds have joined a steering committee set up by the Alternative Investment Management Assocation, the trade body for alternative asset management.

Man Group, Brevan Howard, Lansdowne, Marshall Wace and CQS have declared their opposition to an EU draft policy on Alternative Investment Fund Managers, which they say is flawed and has been rushed through with little consultation.

The proposed directive, which has caused consternation across the industry, imposes draconian new reporting requirements on funds and regulates them and their managers as never before.

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