Derivative-based investments the best performer with 8.44pc Hedge funds were the worst performing of all funds registered for sale in Hong Kong in the third quarter, with an average return of 0.46 per cent, according to Standard & Poor's Fund Services. Overall, funds available for retail sales in the city recorded an average gain of 3.44 per cent, reversing an average loss of 0.92 per cent in the second quarter, according the S&P survey. Growth in the third quarter was fuelled by high returns in funds investing in derivatives and properties while the decline in the second quarter was due to sharp adjustments in global equity markets, it said. Derivative-based funds had an average return of 8.44 per cent between July and last month and were the best-performing products. Such funds include investments in currency instruments such as futures, forward contracts and options. Property funds came second with an average return of 8.36 per cent, followed by equity funds with an average return of 4.04 per cent. Geographically, retail funds investing in Philippine equity had the highest return in the third quarter at 21.35 per cent, S&P said. Middle East equity ranked second, at 20.24 per cent while Indian equity ranked third at 16.9 per cent. Under-performing sectors included smaller companies in Japan which declined 7.85 per cent on average, energy funds which fell 7.81 per cent and gold and precious metals funds which fell 6.37 per cent on average. S&P said the Hong Kong market has outperformed many regional markets and expects the Hang Seng Index to end the year at 18,370 points. The index yesterday gained 4.64 points or 0.03 per cent to 18,014.84. 'With valuations, especially of the blue-chip index heavyweights, now indicating richer levels - at 16 times estimated 2007 earnings, we advocate a more defensive stance with a preference for higher-yielding stocks,' said Lorraine Tan, director of Standard & Poor's Equity Research. 'Our mid-term view remains positive, propelled by property prices sustained at current levels. There is some room for upside given the lack of Grade A office space and new residential projects in central locations and continued domestic consumption driven by rising employment and wages.'