* Average hedge fund ends 2012 up 6.2 pct, lags S&P
* Bets on recovery in asset prices paid off for some
* Bearish bets on Europe lost money
By Laurence Fletcher and Tommy Wilkes
LONDON, Jan 9 (Reuters) - Betting against the European Central Bank, and the eurozone's survival in general, proved a costly strategy for hedge funds in 2012.
Hedge funds who bet Europe's debt crisis would worsen were last year's big losers, lagging those who risked an upbeat stance, according to investors in the industry and data on funds' performance.
For those that did perform well, the biggest gains were made betting on a recovery in beaten-down financial stocks, Greek sovereign debt and sub-prime loans sold by cash-hungry banks, assets that had sold off heavily during the market rout of 2011, the data showed.
But the strong double-digit gains of some - such as CQS's Michael Hintze and Odey founder Crispin Odey - were not enough to stop the average fund, up 6.2 last year according to Hedge Fund Research, from lagging most major equity indexes.
Money managers go in to 2013 needing to prove they can perform - and justify the hefty fees they charge clients.
Investors in a low-fee product tracking the S&P 500 would have gained 16 percent, including dividends, last year, while those in one tracking the FTSEurofirst 300 would have reaped 12.5 percent.
Hedge funds - once touted for an ability to make money in all markets - have also made losses in two of the last five years, in 2008 and 2011.
Global "macro" funds, one of the industry's most-celebrated strategies made by famous by the likes of George Soros and John Paulson, were held back by their bearish views, for instance.
"In hindsight the best thing you could have done over the last few years was to be long risk assets, almost indiscriminately," said Morten Spenner, CEO of hedge fund investor International Asset Management.
"But you had to manage volatility and lock up your assets," Spenner added. "It's important to remember that the first six months of the year were pretty rock and roll ... There were still lots of issues to be solved."
European Central Bank head Mario Draghi pledged in July to do "whatever it takes" to protect the euro zone from collapse, cementing the view the single currency bloc was not headed for imminent break-up and sending equity and bond markets higher.
"After Draghi's speech ... there was very little sense in betting against the European Central Bank even though the fundamentals of the euro zone are still not good. It was very costly for those that did," Sciens Capital's London-based Roberto Botero said.
One of the best trades of the year was buying Greek sovereign bonds at low valuations, when many investors were assuming Athens would exit the single currency.
Julian Adams, CEO at London-based Adelante Asset Management, told Reuters he had made close to 100 percent last year from his position in Greek bonds, helping his fund return 14 percent.
Many of the funds making gains in the upper teens or 20 percent were trading structured credit, said Mark Harrison, Citi's European head of prime finance. Low interest rates pushed many investors to buy these riskier assets for their yield.
Some of the best returns in 2012 were also those bullishly-positioned portfolios that had suffered the previous year.
Stockpicker Crispin Odey's $1.8 billion Odey European Fund soared 27.9 percent last year to Dec. 14, after losing 20.6 percent in 2011, according to data seen by Reuters.
Michael Hintze, one of Europe's most influential hedge fund managers, returned 32 percent to Nov. 30 from his $1.5 billion CQS Directional Opportunities fund. The fund made similar returns in 2010 but lost 10.4 percent in 2011, data showed.
London-based Lansdowne's $7.5 billion Developed Markets fund returned 18.2 percent to Dec. 21, aided by a recovery in shares in UK bank Lloyds, one of its largest holdings.
Not all managers did so well, however. Macro funds lost 0.2 percent on average, according to Hedge Fund Research.
Rock-bottom interest rates and low volatility in their core fixed income markets have sapped trading opportunities and made it increasingly difficult to bet on falling or rising bond yields, a big winner for macro managers in past years.
Brevan Howard's Master fund lost money in the first half of the year but subsequent gains left it up 3.4 percent to Dec. 21, data seen by Reuters shows.
Michael Platt's BlueCrest Capital fared better, with its main fund up more than 5 percent to the end of November, while the flagship fund of Colm O'Shea's Comac Capital lost 9.7 percent to Dec. 21, the data shows.
Elsewhere, the London-based clutch of quantitative funds - which use complex mathematical models to latch onto asset price trends - suffered their second straight year of losses.
With markets lurching from one policymaker's comment to the next, commodity trading advisors, as they are also known, found themselves on the losing side of trades. The average fund fell 3.4 percent last year, the Newedge CTA Trend Sub-Index shows.
Winton Capital, which runs $26 billion and is headed by David Harding, lost 3.6 percent during the year. Aspect Capital fared even worse, losing 10.7 percent, while AHL, part of Man Group, lost 2.9 percent through November.
"It's very difficult to be a trend-follower when you have an announcement from a central banker changing the trend all the time," Botero at Sciens said.