Hedge funds lag traditional asset classes

(MoneyWatch) A truly amazing phenomenon in the world of investing is the continued popularity of hedge funds, especially among high net worth investors. Despite the historical evidence on their lousy performance, hedge funds continue to attract great attention.

So instead of hype and hope, we continue to provide you with the evidence.

The table below presents the returns of the HFRX Global Hedge Fund Index and compares it to the performance of various equity and fixed income indices, both for the period 2003-2011 and for the first nine months of 2012. The index follows an asset-weighted approach to accurately reflect the changing opportunities in the hedge fund. Currently represented strategies are convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage.

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As the data show, hedge funds underperformed every stock asset class over the prior nine years, and even managed to underperform the three bond indexes, while taking far more risk. In the first nine months of 2012, they also underperformed every stock asset class.

There's one more bit of data we need to review -- the performance of the HFRX Absolute Return Index. Absolute return strategies are supposedly designed to generate positive returns in all environments. Through September, the HFRX Absolute Return Index produced its best performance in years, providing a return of 0.01 percent. The index lost 3.7 percent in 2011, 0.1 percent in 2010, 3.6 percent in 2009 and 13.1 percent in 2008.

Apparently, the only thing absolute about the absolute returns funds is that they're absolutely awful.

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 individuals invest in hedge funds for the same reasons they buy a Rolex or carry a Gucci bag -- they're supposed 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 Flickr user 401(K) 2012