The Decline of Hedge Fund Appeal
Another week, another high-profile investor walks away from hedge funds
Many of us will remember when hedge funds carried an air of considerable exclusivity. They promised uncorrelated returns and downside protection coupled with superior insight and were embraced by many investors as the pinnacle of sophisticated investing.
This has changed. Now part of investment folklore, Warren Buffett bet that a low-cost S&P 500 index fund would beat a selected group of hedge funds over a decade. It wasn’t even close. The index fund outperformed by nearly 90 percentage points. That wager concluded in 2018 but its relevance remains undiminished.
Just this week, the University of California’s $190 billion endowment and pension fund announced it had exited hedge fund investments. Its CIO was blunt in his criticism of the sector pointing to the fact that most hedge funds have badly failed to meet expectations delivering poor returns and despite charging high fees. [Financial Times, July 2025]
A July 2025 Preqin report confirmed this. It showed that hedge funds returned just 4.8% annualised over the last five years. This is well below the estimated 11.3% annualised return of U.S. equity market averages for the same period (SoFi and Investopedia). Performance continues to lag. According to Reuters, hedge funds returned just 3.9% year-to-date trailing the S&P 500’s 5.5%. Even multi-strategy giants such as Citadel and Millennium Management, long considered institutional favourites, are under rigorous scrutiny.
So why does this matter now?
Because investors will increasingly be revisiting old assumptions. The next decade will not continue to reward complexity for its own sake. Buffett’s bet was about both numbers and clarity. In most cases, a simple, boring and low-cost equity index fund still consistently beats the glamour of the black box.
Today, investors have a far wider array of effective diversifiers ranging from private debt and equity, infrastructure, gold crypto and real assets all offering viable alternatives to traditional public equity and bonds.
There is a critical lesson here for institutions and individual investors alike.
#investing #hedgefunds #warrenbuffett #indexfunds #preqin #endowments #assetallocation #passiveinvesting #alphavsfees #HFR #portfoliostrategy