Hedge funds bitten by Apple

(MoneyWatch) CNBC reported yesterday that two large hedge funds dumped Apple stock during the first quarter of the year. David Tepper's Appaloosa Management cut its Apple (AAPL) stake by about 40 percent, while Julian Robertson's Tiger Management sold its entire position in the technology giant.

These sales took place after large declines in Apple's shares, which closed down 3.4 percent. That was enough for Apple to relinquish its status as the most valuable company in the world to Exxon Mobil (XOM) for the third time so far this year.

Though Apple was clearly the most chased stock on the planet last year, this story perfectly illustrates what is wrong with hedge funds today. Ten years ago, hedge funds prospered by playing in markets that were inefficient. Buying illiquid assets in spaces few looked at allowed them to cover their standard fee of 2 percent annually, plus 20 percent of the profits.

Then the popularity of hedge funds started to take off and the game changed to the tune of a couple trillion dollars flowing in. But since the funds can't invest all that money in inefficient and overlooked corners of the economy, they must now buy stocks like Apple, probably the most closely scrutinized company on the planet.

The Dow Jones Credit Suisse Core Hedge Fund Index is up 3.54 percent through May 9, badly lagging the 15.05 percent the U.S. stock market returned, as measured by the Vanguard Total Stock Market Index Fund ETF (VTI). But this is merely a continuation of a trend in underperformance.

William Bernstein's eBook, "Skating Where the Puck Was," brilliantly details how investors skated to hedge funds in time to see yesterday's winners become today's losers.  These days it appears the hedge fund managers are skating to yesterday's winners as well.

The story of dumping Apple after the stock has already plunged demonstrates that investors no longer have to choose between outrageously high fees and performance-chasing by buying what's hot and selling what's not. It's now possible to have them both, which is downright dumb. The time has come to take a hard look at today's hedge funds and recognize that the ship has sailed on their wealth-building glory days. Well, for everybody except the fund managers.