Common Sense: Hedge Funds Should Be Thriving Right Now. They Aren’t.

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Hedge fund marketers have shrewdly exploited those fears and the still-vivid memories of 2008’s market rout, which left many pension funds and endowments reeling. “It is fair to say the hedge-fund guys are very smart in the way they market the asset class,” Mr. Dewan said.

Hedge funds didn’t protect investors from losses in the last bear market, but they did fare better than the S. & P. 500. Hedge funds on average lost 18.3 percent in 2008. The S. & P. 500 dropped 38.5 percent.

Given the weak returns, hedge-fund marketers have largely abandoned their strategy of pitching themselves as “absolute return” investments that perform well in both strong and weak stock markets. Now, at a time of low and rising interest rates, they’re describing themselves as more attractive than fixed-income assets like bonds, which have traditionally provided a haven when investors thought stocks were overvalued. Bonds and bond funds also tend to have much lower fees.

Hedge funds this year have outperformed the S. & P.’s United States bond index, which has lost 1.17 percent. But virtually risk-free two-year Treasury notes are currently yielding 2.55 percent — more than what hedge funds, which are far from risk-free, are on track to generate this year.

In any event, comparing hedge funds with low-yielding bonds after years of promising much higher returns is just “moving the goal posts,” said Simon Lack, author of “The Hedge Fund Mirage.”

Of course, the weak average returns mask the fact that some hedge funds have done comparatively well. So far this year, so-called activist funds, whose managers take positions and call for board and management change, have gained 2.78 percent. Merger arbitrage funds, which bet on whether corporate deals will come to fruition, gained 2.63 percent. But nothing comes close to last year’s 21.14 percent gain in the S. & P. 500 (including reinvested dividends).

Mr. Heinz conceded that the average hedge fund’s return of 0.81 percent “isn’t exactly hitting it out of the park,” but it is still better than most European and Asian stock indexes as well as the Dow Jones industrial average, which has declined 1.81 percent.

Mr. Lack said he isn’t surprised that hedge funds keep attracting new money. Inertia is powerful, and the industry of hedge-fund boosters is loud. “I’ve yet to meet a public pension plan interested in paying a consulting fee for a critical analysis of their hedge-fund allocation,” he said.

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