Once Again

Nevertheless, hedge funds do appear to be outperforming the market on average, even in this downturn.  This is, of course, at the expense of much higher fees, which may wipe out any earnings.  Without capital restrictions, expenses should be set to a level that offsets any outperformance of the market: if one fund were able to outperform, investors would move money in until demand caused it to regress to the mean.  Reality obviously doesn't conform so well to this story, but believing in the supremacy of the hedge fund is an even greater fiction.  For risk-averse individuals, one also must account for the nontrivial probability that the hedge fund one chooses will fold.  Similarly, identifying the fund that will outperform in the future is nearly impossible.  Adaptive expectations are simply wrong most of the time, and rational ones have huge margins of error.  Thankfully for index funds, it is pretty hard for the entire global economy to fold.  At that point, the difference between annualized returns of 10 percent versus 12 percent is moot.

That said, the current crisis appear to be flush with very interesting and unusual ways of doing quite well.  There are all sorts of rare opportunities in the bond markets, government securities are bizarrely out of equilibrium, and certain commodities appear waiting to crash or recover (e.g. gold and oil).  These might be just as foolish as mutual funds, but investing one's money in them is the only way to find out.  Perhaps this is why the racket that is the mutual fund industry still exists.