Basically the title. Hedge funds underperform every year as compared to broader ETFs like S&P500 by more than 10%! Given this, who invests in hedge funds? Are they stupid or am I stupid?
[https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/](https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/)
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Hedge funds when viewed collectively, i.e. “on average”, underperform the index over a number of years. There are some hedge funds that outperform the index over a more limited time.
Those that keep underperforming usually wind down because investors keep withdrawing money from them.
However because there are always some hedge funds posting decent returns for a small period, that attracts investment from people who either believe the fund can do better than the index in the next period as well, or because they want to diversify in some way and think allocating some money to this fund can be part of their overall investment mix.
In short, its a combination of hope (greed?) and diversification.
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