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Hedge Fund Update for Second Quarter 2011

In what truly must be a story of the triumph of hype and hope over wisdom and experience, hedge funds continue to see inflows despite lousy performance.

Hedge funds took in a whopping $8.1 billion in May, and they've experienced inflows each month this year. However, this seems to defy logic, as BarclayHedge founder Sol Waksman told Dow Jones Newswires: "The industry hauled in $75.0 billion in the first five months of 2011, which marks the heaviest such inflow since 2007. Performance, however, has hardly been stellar. The Barclay Hedge Fund Index shows a year-to-date return of just 2.1 percent through May, and many managers are in the red for the year."

Our second quarter hedge fund update provides further evidence on the failure of hedge funds by comparing them to widely used benchmarks. 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 2003-2010 and also for the first half of the year. The evidence speaks for itself.

The only explanations I can come up with are that investors:

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