Hedge Fund Update for November

Last Updated Nov 11, 2010 11:38 AM EST

It looks like hedge funds are back in favor. It's too bad some investors just don't look at the evidence.

According to The Wall Street Journal: "Just a year after getting burned by the steep losses, high fees and lock-up windows of hedge funds, the wealthy are piling back into these investments." The article noted that half of households with $25 million or more in assets had investments in hedge funds in 2010, up from 35 percent just before the financial crisis hit three years ago.

This may have to do with the "great" returns hedge funds have been reporting lately. For example, FinAlternatives reports that: "Hedge funds followed up their best September ever with further gains in October, according to a trio of early-reporting indices. Hedge Fund Research's HFRX index rose 1.12% on the month (4.8% year-to-date), the Bloomberg Aggregate Hedge Fund Index added 1.5% (4.2% YTD) and the Credit Suisse Liquid Alternative Beta Index returned 1.14% (3.58% YTD)."

Now let's compare these returns to returns of publicly available indexes. (Returns are for the period January 2010 through October 2010.) We'll let the evidence speak for itself.

Domestic Indexes S&P 500 -- 7.8 percent
MSCI US Small Cap 1750 (gross dividends) -- 15.1 percent
MSCI US Prime Market Value (gross dividends) -- 6.8 percent
MSCI US Small Cap Value (gross dividends) -- 13.6 percent
Dow Jones Select REIT -- 24.7 percent

International Indexes MSCI EAFE (gross dividends) -- 5.1 percent
MSCI EAFE Small Cap (gross dividends) -- 13.7 percent
MSCI EAFE Value (gross dividends) -- 2.4 percent
MSCI Emerging Markets (gross dividends) -- 14.3 percent

Fixed Income Merrill Lynch One-Year Treasury Note -- 0.8 percent
Five-Year Treasury Notes -- 9.9 percent
20-Year Treasury Bonds -- 16.2 percent

This really isn't anything new. The following, from my upcoming book The Quest for Alpha, presents the results of the HFRX index compared to the same public indexes for the period 2003-2009. While the HFRX Index provided a return of 2.4 percent per year, see how it stacked up.

Domestic Indexes S&P 500 -- 5.5 percent
MSCI US Small Cap 1750 -- 9.9 percent
MSCI US Prime Market Value -- 6.0 percent
MSCI US Small Cap Value -- 9.3 percent
Dow Jones Select REIT -- 8.8 percent

International Indexes MSCI EAFE -- 10.3 percent
MSCI EAFE Small Cap -- 14.5 percent
MSCI EAFE Value -- 11.4 percent
MSCI Emerging Markets -- 22.0 percent

Fixed Income Merrill Lynch One-Year Treasury Note -- 2.9 percent
Five-Year Treasury Notes -- 4.2 percent
20-Year Treasury Bonds -- 5.1 percent

For the period 2003-09, the HFRX Index underperformed not only all the major equity asset classes, but they also underperformed fixed income indexes.

The bottom line is that the evidence continues to demonstrate that hedge funds are the triumph of hope, hype and marketing over wisdom and experience.

More on MoneyWatch:
Some Hedge Fund Managers Don't Tell the Truth Hedge Funds' Rotten Record Have You Been Misled by Returns Information? Who's Smarter: Active or Passive Investors? With TIPS, Should You Buy, Hold or Sell?
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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.