Hedge funds posted their best month of the year in April, but still badly lagged the broader markets, according to the Hennessee Group.

The Hennessee Hedge Fund Index added 3.84% last month, and is up 5.02% on the year. But while just two of the firm’s 23 strategy index lost ground in April, not a single one matched the advance of the Standard & Poor’s 500 Index, which rose 9.39%. The S&P500 is down 3.37% on the year.

“April continued to be a challenging environment for hedge funds, as the market rally was driven by short covering and momentum, rather than changes in fundamentals,” Charles Gradante of Hennessee said. “While we have seen some improvement in data (most typically that the rate of deterioration is slowing), most funds remain conservatively positioned. Funds are cautious and will wait for fundamentals to improve before significantly expanding their net exposures.”

Distressed funds were the best performer in April, rising 7.49% (6.99% year-to-date), according to Hennessee. Value funds added 5.99% (4.52% YTD), Asia-Pacific funds 5.71% (3.41% YTD) and convertible arbitrage funds 5.58% (15.34% YTD). Convertible arb. is the top-performing strategy on the year so far.

The two strategies to actually lose ground during the April rally were, unsurprisingly, short-bised funds, which plummeted 9.42% (down 6.91% YTD), almost as much as the S&P500 added, and merger arbitrage, which shed 0.71% (up 1.38% YTD).

Gradante says things will get somewhat worse before becoming consistently better.

“I expect to see a correction in the short term as this market has gotten ahead of itself,” he said.