Apparently hedge funds are sucking wind. According to this CBS News article they have lagged behind every major equity index since 2003. They have even lagged a few bond indexes and they have generated this lackluster performance while exhibiting more risk than the underlying indexes. Sound good? Where do I sign up?
The verdict: Hedge funds underperformed every stock asset class over the prior nine years and even managed to underperform the three bond indexes, while taking more risk. In the first quarter, they far underperformed every stock asset class, though they did manage to outperform bonds.
Given the evidence, the only logical explanations I can think of for the continued popularity of hedge funds are that either investors are unaware of the data, or that individuals invest in hedge funds for the same reasons they buy a Rolex or carry a Gucci bag with an oversized logo — they’re expressions of status, prestige, exclusivity, and sophistication. Letting such emotions determine investment decisions is a recipe for transferring assets from your wallet to those of the purveyors of products.
Despite what the author says, I believe that the real reason why people invest in hedge funds is that they think that they can pick the winners that beat the stock indexes. After all, how many hedge fund investors buy hedge fund indexes. They buy individual funds. Buying a hedge fund index kind of defeats the whole purpose of investing in hedge funds, don’t you think?