Hedge Funds Lag Behind a Generic Stock/Bond Mix

Before they discovered hedge funds, pension funds and school and foundation endowments typically held portfolios with 60 percent in equities and 40 percent in bonds. Many would be better off if they had stuck with that formula. Hedge funds have trailed both the Standard & Poor’s 500-stock index and a Vanguard index fund with the 60/40 mix over the past five years, according to data compiled by Bloomberg. “People hear about the top-performing hedge funds, and they assume those results hold true for the whole industry,” says George Sauter, chief investment officer for Vanguard Group. “It turns out that, on average, hedge funds are about average.”

Investors are still drawn to hedge funds by the returns of top managers such as Paul Singer of Elliott Management and Seth Klarman of Baupost Group. Total hedge fund assets reached $2.1 trillion as of March 31, more than four times their level in 2000, data from Hedge Fund Research show. That’s making it difficult for the hedge fund industry to produce better results than other asset classes, says Simon Lack, a former executive at JPMorgan Chase and author of the 2012 book The Hedge Fund Mirage. “You have more money chasing fewer opportunities,” he says.