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Barry Ritholtz

The Most Fascinating Investing Paradox

Investors keep pumping money into hedge funds, even though they would do better buying index funds.
One area of hedge-fund overperformance.

One area of hedge-fund overperformance.

Photographer: Manjunath Kiran/AFP/Getty Images

Earlier this week, Greg Zuckerman of the Wall Street Journal pointed out one of the great mysteries of today's investment landscape: Despite underperforming by a substantial margin, hedge funds keep attracting more investors and assets under management. It is almost as if (to borrow the headline on Zuckerman’s article), "Hedge Funds Keep Winning Despite Losing."  He wrote:

Consider the data: According to HFR, a firm that created indexes to track hedge-fund performance, the average hedge fund gained a mere 3 percent in 2014 versus an 11 percent rise in the Standard & Poor's 500 Index. That's hardly worth paying a hedge fund outsized 2 percent management fees plus a 20 percent cut of the profits.