Hedge Funds vs. S&P 500: The Truth About Investment Returns 📈💼 (2024)

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Hedge Funds vs. S&P 500: The Truth About Investment Returns 📈💼? ›

Reality Check: S&P 500 Outperforms Hedge Funds 🚀

The average annual gain for the S&P 500 fund was 8.5%, or about 125% compounded for the decade. That means $1 million invested in the index fund more than doubled to about $2.25 million. For the hedge funds—not so much. The best one averaged 6.5% a year, or about 88% compounded.

The average annual return on investment for hedge funds varies widely depending on the fund's strategy, market conditions, and the skill of the fund managers. Historically, it's been around 6-8%, but this can fluctuate significantly.

Components of hedge fund cash yields:

As a result, hedge fund strategies can often have high cash balances, which they invest in short-term cash instruments, including money market funds and treasuries. At current interest rates, these strategies are now earning over 5% on their cash, compared to near zero since 2008.

Enormous fees – lucrative for the hedge fund manager but not for you. Not transparent – delayed and partial information about your holdings. Not liquid – takes a long time to get your money back. Very tax inefficient – large and unpredictable obligations for taxable investors.

Berkshire Hathaway

A big cash pile protects the above-average core operations of this stellar company. Warren Buffett has an incredible track record of outperforming the S&P 500.

Overall, the consensus is that hedge funds will continue to grow but will adapt to lower fees, greater use of technology, and increased access to retail investors.

One of the most profitable hedge funds of all times, Citadel generated $16 billion in profits for its investors in 2022, and earned $65.9 billion in net gains since 1990, making it the top-earning hedge fund ever.

Hedge funds are risky in comparison with most mutual funds or exchange-traded funds. They take outsized risks in order to achieve outsized gains. Many use leverage to multiply their potential gains. They also are unconstrained in their investment picks, with the freedom to take big positions in alternative investments.

All hedge funds tracked by BNP Paribas returned an average of 7.66% in 2023, differing from the survey results released on Feb. 12. In 2022, these hedge funds returned an average of 0.42%, said a BNP spokesperson. However, survey respondents said their hedge fund portfolios returned an average of 1.1% in 2022.

Do hedge funds actually beat the market? ›

There are over 3,400 hedge funds in the U.S. It's a big business. But almost none of them consistently outperform the broader stock market. Investing in the S&P 500 is the most straightforward path to stock market riches.

Hedge funds seem to rake in billions of dollars a year for their professional investment acumen and portfolio management across a range of strategies. Hedge funds make money as part of a fee structure paid by fund investors based on assets under management (AUM).

If your market outlook is bullish, you will need a specific reason to expect a hedge fund to beat the index. Conversely, if your outlook is bearish, hedge funds should be an attractive asset class compared to buy-and-hold or long-only mutual funds.

That makes outperforming the S&P 500 on a consistent basis no small task. The one fund that has beaten the index in nine of the past 10 years is the Technology Select Sector SPDR Fund (NYSEMKT: XLK).

Key Points. Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.

Billionaire investor Ken Griffin's various hedge fund strategies at Citadel all posted double-digit returns for 2023, but they failed to beat the S&P 500. Citadel's multistrategy Wellington fund gained 15.3% last year, according to a person familiar with the returns.