Like many hedge fund sectors, market-neutral equity funds were saved from a truly forgettable year by the jump in equity volatility starting in early November. The Hedgefund.net index of 180 funds was up 3.97% last year, 2.10% of which came in the last two months. In 2003, the index returned 5.68%.

Market neutral equity funds are generally stock- or sector-picking funds that usually don’t seek to make directional bets on the broader market. This is done by the managers seeking to roughly balance the dollar amounts of their long and short positions within specific corporate sectors and the broader market.

One portfolio manager who rode stock- and sector-picking to solid returns last year was Vega Partners founder Vladimir Naroditsky, whose $30 million fund was up 18.94% last year and 11.50% in 2003. Some of the fund’s biggest winners were trades in oil drillers and oil drilling equipment manufacturers. Looking back on the oil picks, macroeconomic fundamentals were the basis of these trades: “We never saw either demand dropping or the price of oil dropping below $44 a barrel. At that point, we saw a lot of profitability for these companies,” said Mr. Naroditsky. The fund still has a number of trades on in this sector since its managers don’t see oil prices dropping in the near future.

Another way the Berkeley, Calif.-based Mr. Naroditsky tries to increase returns is looking at what might be called extending his investment thesis. For example, given his belief in the continued profitability of oil companies, he has been buying shipping companies on the belief that oil production will spike to meet expanding demand as the American economy continues to expand.

On the other side of the ledger, performance was capped by a series of bets on semiconductor stocks that failed. “I kept waiting for tech earnings to explode; they didn’t. I would have done better shorting these stocks,” he said.

A hedge fund that had trouble with its strategy last year was the $25 million Scivest Offshore Market Neutral fund, which dropped 6.84% in 2004. The fund’s management style is heavily quantitative, said Michael Bonn, a principal at the fund. Mr. Bonn said that the fund’s portfolio team has built a model that can hold up to 360-370 different stocks at a time that uses dozens of different market indicators to determine selection.