Must-Read: Matt Levine: Hedge Fund Results:

Since the end of 2011, hedge funds as a whole have (1) produced negative alpha and (2) added almost $900 billion of assets...

Why? This seems to be the best explanation:

Why? This seems to be the best explanation:

There are various reasons why investors are still by and large faithful to Hedge Funds, even if they are disappointed by their recent performance. One of the most important reasons is that it is difficult to find an alternative with similar risk / return characteristics. And when the risk-adjusted returns are combined with the low correlation they tend to have, the impact on investors’ portfolios tend to be positive. Indeed, according to our analysis in Figure 13, a majority (55%) of HFs, even in a year like 2015 where HFs did not perform particularly well, would have been additive and improved the efficient frontier of the 60 / 40 portfolio. Thus while performance may have seemed poor on a stand-alone basis, there appears to be a role for HFs in investors’ portfolios.

Improving the efficient frontier of the 60/40 portfolio is a rather lower bar than providing alpha, but there you go. A lot of sophisticated investors pay hedge funds' fees because they think -- often correctly! -- that those hedge funds, as part of a balanced diet, improve the overall performance, and reduce the overall risk, of their investments. It is not a magic-masters-of-the-universe-doubling-your-money-every-year sort of explanation, but it seems to get the job done.