## [# Swedroe: Enough With The Hedge Fund Hype](/sections/index-investor-corner/swedroe-enough-hedge-fund-hype)
# Swedroe: Enough With The Hedge Fund Hype
Hedge funds promise a lot and cost even more, but they’re again falling short in 2014.
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[By Larry Swedroe](/contributors/larry-swedroe)
Jul 23, 2014
Edited by: Larry Swedroe
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Hedge funds promise a lot and cost even more, but they’re again falling short in 2014.
Hedge funds promise a lot and cost even more, but they’re again falling short in 2014.
The first half of this year again brought hedge funds little relief from their historically poor performance.
Hedge funds began 2014 coming off their [fifth-straight year of trailing U.S. stocks](https://www.bloomberg.com/news/2014-01-08/hedge-funds-trail-stocks-for-fifth-year-with-7-4-return.html) by some significant margins. And based on data through June 30, it doesn’t look like this year is shaping up to be much better. The latest data show that investors continue to pour money into hedge funds, which had [total assets under management at the end of April of $2.9 trillion](https://www.thinkadvisor.com/2014/06/30/investors-are-flocking-to-hedge-funds-despite-unde), a new record.
Despite ample evidence of their underperformance, hedge funds continue to attract great attention from investors. I’ll never stop asking, Why? And instead of the hype and hope that investors so often hear from hedge fund managers, I’ll simply continue to provide you with the hard data on their performance.
The table below shows the returns of the HFRX Global Hedge Fund Index for the first half of 2014 as well as the 10-year period from 2004-2013. It also shows the returns of several equity asset classes and those for one-, five-, and 20-year Treasurys.
Over the prior 10 calendar years, the HFRX Global Hedge Fund Index—which follows an asset-weighted approach in an attempt to accurately reflect changing opportunities in the hedge fund industry—managed to underperform every major equity asset class and even the three Treasury indexes.
FundAnnualized
Return (%)
2004-2013Total Return (%)
January-June
2014**HFRX Global Hedge Fund Index**1.01.8**Domestic Indexes**S&P 500 Index7.47.1MSCI US Small Cap 1750 Index (gross dividends)10.45.5MSCI US Prime Market Value Index (gross dividends)7.48.1MSCI US Small Cap Value Index (gross dividends)9.46.7Dow Jones US Select REIT Index8.218.2**International Indexes**MSCI EAFE Index (net dividends)6.94.8MSCI EAFE Small Cap Index (net dividends)9.55.5MSCI EAFE Small Value Index (net dividends)10.16.6MSCI EAFE Value Index (net dividends)6.86.0MSCI Emerging Markets Index (net dividends)11.26.1**Fixed Income**Bank of America Merrill Lynch One-Year Treasury Note Index2.10.1Five-Year U.S. Treasury Notes4.31.520-Year U.S. Treasury Bonds6.110.9In the first half of 2014, the HFRX index returned 1.8 percent. In reviewing the data, it’s hard to understand why assets keep flowing into the industry. Through the end of June, hedge funds underperformed each of the major domestic equity asset classes, as well as each of the five international asset classes. And while they barely outperformed one- and five-year Treasurys, they underperformed returns on 20-year Treasurys.
As is our practice, we’ll compare that return to the performance of three standard 60 percent stock and 40 percent bond portfolios. For their equity portion, each of the three portfolios we will consider weights equally the 10 stock indexes in the table above.
That means each stock index represents 6 percent of the total portfolio, and that both domestic and international stocks each represent 30 percent of the total portfolio, or half the equity allocation. For their fixed-income portion, our portfolios each use one of the three bond indexes below.
- Portfolio A uses one-year Treasury notes
- Portfolio B uses five-year Treasury notes
- Portfolio C uses 20-year Treasury bonds
Here are the results:
Fund/PortfolioReturns (%)HFRX Global Hedge Fund Index1.8Portfolio A4.5Portfolio B5.1Portfolio C8.8As you can see, when it comes to hedge fund performance, the evidence, both historical and current, speaks for itself. Yet hedge funds continue to thrive.
Last year, net inflows to the global hedge fund industry were almost $64 billion. Unfortunately, investors in hedge funds haven’t fared as well as fund vendors or managers. In 2013, the [top 25 hedge-fund earners pulled down $24.3 billion, up about 50 percent from 2012](https://www.forbes.com/sites/nathanvardi/2014/02/26/the-highest-earning-hedge-fund-managers-and-traders/). The result is one of the more puzzling anomalies in finance—the continued growth of an industry that for a long time has delivered miserable results for investors.
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Larry Swedroe is the director of Research for the BAM Alliance, 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)
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