For the privilege of paying exorbitant fees, investors in hedge funds have suffered the indignity of underperforming a simple indexed stock/bond portfolio yet again. ETFReplay reports that year-to-date, hedge funds as a whole are showing a gain of around 1% while a simple 60/40 stock bond portfolio has appreciated over 6%. Longer term studies have demonstrated hedge funds to be poor investments [link]; also over 7 years [link].
One of the great mysteries in the world of finance is why anyone would invest in hedge funds given fees that while, supposedly falling, still reportedly average over 1.5% annually along with a performance fee of over 15% [Source: Hedge Funds Review]. This userous level of fees virtually eliminate any gains to the investors in the average hedge fund.
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Bloomberg has an article on why hedge funds lag index funds.
From the article by Charles Stein: The main Bloomberg hedge fund index, which is weighted by market capitalization and tracks 2,697 funds, fell 2.2 percent a year in the five years ended June 30. The Vanguard Balanced Index Fund (VBINX), which has a 60/40 split of equities and bonds, gained 3.5 percent annually and the S&P 500 Index gained 0.2 percent a year.
One problem mentioned is their large scale is making it difficult to find opportunities. David Swensen says the fees hedge funds charge are also a huge drag on returns.
Despite these issues, it is expected hedge funds will grow because of a desperate quest for returns in a low rate environment.
Hedge funds are probably growing because many individuals in charge of pensions and endowments are math challenged, because simple math reveals they are a particularly dangerous financial potion.