## [# Swedroe: 2018 Report Card For Hedge Funds](/sections/index-investor-corner/swedroe-2018-report-card-hedge-funds)
# Swedroe: 2018 Report Card For Hedge Funds
Last year produced mixed results across asset classes for hedge funds, but market efficiency won again.
[](/contributors/larry-swedroe)
[By Larry Swedroe](/contributors/larry-swedroe)
Feb 04, 2019
Edited by: Larry Swedroe
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Hedge funds entered 2019 coming off their ninth-straight year of trailing U.S. stocks (as measured by the S&P 500 Index) by significant margins.
And for the 10-year period ending 2017—one that included the worst bear market in the post-Depression era—the HFRX Global Hedge Fund Index produced a negative return (-0.4%), underperforming every single major equity and bond asset class.
So how did hedge funds fare in 2018? The following table shows the returns for various equity and fixed-income indexes. The [HFRX Global Hedge Fund Index](https://www.hedgefundresearch.com/family-indices/hfrx) returned -6.7%.
Through
December 2018 (%)**HFRX Global Hedge Fund Index**-6.7**Domestic Indexes** S&P 500 -4.4MSCI US Small Cap 1750 (gross dividends) -11.0MSCI US Prime Market Value (gross dividends)-7.4MSCI US Small Cap Value (gross dividends)-12.9Dow Jones Select REIT -4.2 **International Indexes** MSCI EAFE (net dividends) -13.8MSCI EAFE Small Cap (net dividends) -17.9MSCI EAFE Small Value (net dividends) -18.2MSCI EAFE Value (net dividends) -14.8MSCI Emerging Markets (net dividends) -14.6 **Fixed Income** Merrill Lynch One-Year Treasury Note 1.9Five-Year Treasury Notes 1.220-Year Treasury Bonds -0.6As you can see, the hedge fund index outperformed eight equity asset classes, but underperformed all fixed-income indexes. We can take our analysis a step further and determine how hedge funds performed against a globally diversified portfolio.
**Key Comparisons**
An all-equity portfolio allocated 50% internationally and 50% domestically, equally weighted among the indexes from the table within those broader categories, would have lost 11.9% over the year, underperforming the hedge fund index by 5.2%.
Another comparison we can make is to a typical balanced portfolio of 60% equities and 40% bonds. Using the same weighting methodology as above for the equity allocation, the portfolio would have lost 6.4% using one-year Treasuries (outperforming the hedge fund index by 0.03%), lost 6.7% using five-year Treasuries (performing in line with the hedge fund index), and lost 7.4% using long-term Treasuries (underperforming the hedge fund index by 0.70%).
As mentioned earlier, hedge funds outperformed most equity asset classes we reviewed in 2018. However, they performed roughly in line with a 60/40 portfolio with five-year Treasuries. Thus, in a down market, hedge funds didn’t offer any protection compared to a standard diversified portfolio.
If we look back over the 10-year period ending December 2018, the HFRX index earned 1.5% per year on average, compared with 10.2% per year for the equal-weighted equity index and 6.9% for the same 60/40 portfolio with five-year Treasuries. Five-year Treasurys earned 2% per year. Here’s the full breakdown of each asset class over the 10 years:
10 Years Through
December 2018 (%)**HFRX Global Hedge Fund Index**1.5**Domestic Indexes** S&P 500 13.1MSCI US Small Cap 1750 (gross dividends) 13.3MSCI US Prime Market Value (gross dividends)11.4MSCI US Small Cap Value (gross dividends)11.9Dow Jones Select REIT 12.0 **International Indexes** MSCI EAFE (net dividends) 6.3MSCI EAFE Small Cap (net dividends) 10.5MSCI EAFE Small Value (net dividends) 10.1MSCI EAFE Value (net dividends) 5.5MSCI Emerging Markets (net dividends) 8.0 **Fixed Income** Merrill Lynch One-Year Treasury Note 0.6Five-Year Treasury Notes 2.020-Year Treasury Bonds 3.7**Market Efficiency The Foe**
Despite attracting some of the brightest minds in finance, hedge funds continue to struggle to outperform broader market indexes. The problem is that the efficiency of the market, as well as the cost of the effort, can turn a supposed advantage into a handicap. Given the evidence on hedge funds’ underwhelming results, it’s a puzzle why they are still managing about $3 trillion in assets.
*Larry Swedroe is the director of research for* [*The BAM Alliance*](https://thebamalliance.com/)*, a community of more than 130 independent registered investment advisors throughout the country.*
[ Larry Swedroe ](/contributors/larry-swedroe)
Larry Swedroe is a principal and the director of research for Buckingham Strategic Wealth, an independent member of the BAM Alliance. Previously, he… [View Bio](/contributors/larry-swedroe)
Related Topics [Equity](http://www.etf.com/topics/equity)
[Hedge Funds](http://www.etf.com/topics/hedge-funds)
[Asset Allocation](http://www.etf.com/topics/asset-allocation)
[Fixed Income](http://www.etf.com/topics/fixed-income)
[Bond](http://www.etf.com/topics/bond)