The Problem with Hedge Fund Returns

These days, everybody from Warren Buffet, to public pension funds, to commentators on CNBC seems to be complaining about the lackluster performance of hedge funds. These commentators tend to focus on absolute returns over the past 10 years. Over this period, hedge funds returned 67% compared to 300% for the S&P 500. But is this comparison fair? Hedge fund returns may have been disappointing, but not necessarily for the reasons these critics are suggesting. The real problem is risk. With better systems, incentives and communication, hedge funds could easily deliver much higher returns.