The Test Bench › famous_system
Does Hedge Funds, Average (HFRI composite, net of fees) actually work?
MYTHA famous idea that does not survive an honest test.
The claim
Smart money, absolute returns, worth 2-and-20 — The hedge fund industry
What we did
Tested against Buy & hold SPY / honest reconstruction.
The result
Result: Avg hedge fund ~6-8%/yr since 2009 vs S&P ~13%; beat the index only in down years (2015, 2018, 2022)
Avg hedge fund ~6-8%/yr since 2009 vs S&P ~13%; beat the index only in down years (2015, 2018, 2022)
Verdict
The expenses are the story: 2-and-20 (a 2% management fee PLUS 20% of profits) turns ~12% gross into ~7.6% net before the gap even opens; fund-of-funds stack another ~1-and-10 on top. The average hedge fund has trailed a cheap index fund for 15+ years and only 'wins' by losing less in bad years. You pay hedge-fund prices for less-than-index returns.
What the test did and did not do
- net of real costs
- tested out of sample
- point-in-time data
- checked for look-ahead
Almost nobody publishing a backtest says which of these they did. We list the ones we failed as well as the ones we passed.
Tested 2026-06-23. The same treatment, applied to every other system, is on the test bench.
Written with AI assistance from our own test database. The numbers are computed, not composed.
General market commentary for education, not personalised investment advice. Backtested results are hypothetical. Trading carries a real risk of loss.