Despite their rep, hedge funds disappoint

Flickr user Images_of_Money

(MoneyWatch) A truly amazing phenomenon is the continued popularity of hedge funds, especially among high net worth investors. Despite the historical evidence on their lousy performance (as presented in my book "The Quest for Alpha"), hedge funds continue to attract great attention.

Instead of hype and hope, by contrast, we continue to provide you with something more reliable to evaluate how these funds have fared -- evidence. The table below presents the returns of the HFRX Global Hedge Fund Index and compares it to the performance of various stock and bond indexes, both for the period 2003-2011 and for the first quarter of 2012. We'll do another review after each quarter.

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.

Image courtesy of taxbrackets.org

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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