What has gone wrong with the hedge fund sector?

I realise it is a bit unfair to pick on the bullied kid in the playground, but it is hard not to wonder whether the ‘alternative investment' space has lost the plot. Of course, it was not supposed to be like this. The hedge fund industry - with some notable exceptions - had a horrible financial crisis, but the halting recovery after 2009 was supposed to be kinder to the wunderkinds of the investment world.

Obviously, you can torture performance data to tell any story your heart desires, but the growing number of hedge fund indices tells us a remarkably similar story - hedge funds have had a miserable few years. The benchmark HFRX Global Hedge Fund index, for instance, (at www.hedgefundresearch.com) ticked up a meagre 13% in 2009, was up just 5% in 2010 and then lost 8.87% in 2011. For the year to date, the index is up a disappointing 2.17%. The Dow Jones Credit Suisse Core Hedge fund indices (www.hedgeindex.com) shows YTD performance of 1.25%, with only convertible arbitrage pulling away f...