It's been another dismal year for many hedge funds, with the Hedge Fund Research Inc. Fund Weighted Composite Index up just 0.27 percent through Dec. 15, barely beating the S&P 500 stock index's slight loss for the year so far. Some of the industry's stars have struggled mightily, failing to deliver the edge that investors expect, even — or especially — when the broader market is just about flat.
Hedge funds have underperformed the S&P 500 for years: The HFRI Fund Weighted Composite Index returned an annualized 3.2 percent for the five years ended Nov. 30, compared to 12.5 percent for the S&P 500 for the five years through Dec. 22. But, despite some signs that investors are now losing patience with the underperformance, the industry still enjoyed an inflow of $80 billion in the first three quarters of this year, according to research firm Preqin. So far this year, 57 more hedge funds have opened for business than have closed.
So what gives? Why do investors — including many public pension funds — remain willing to pour their cash into such a lagging investment class?