Hedge Fund Has-Beens

But there are two problems with the coming-apocalypse theory. The first is that the more hedge funds there are, the smaller the chance of a massive blowup. The people who have the money -- huge pension funds and the super rich -- are scattering their chips more widely across the table, using so-called "funds of funds," which exist for that reason. (The day surely can't be far off when some bright spark launches a "fund of fund of funds".)

The second point, though, is even simpler. We don't need to guess if the bubble is ending with a whimper ... because it already is. Take a look at the most recent industry data. During 2006, the average hedge fund returned between 12.9% and 13.86% -- depending on whether you believe the industry performance index compiled by Hedge Fund Research or the one from Credit Suisse/Tremont.

Over the same period, the most basic mutual fund there is, the (VTSMX Quote)Vanguard Total Stock Market Index Fund (VTSMX), posted a total gain of ... 15.63%. In other words, the typical hedge fund did two full percentage points worse last year than the simplest index fund open to everybody.

It doesn't end there.

Over the past two years, the average hedge fund gained either 22.5% or 23.4%, according to Credit Suisse/Tremont or HFR. The Vanguard fund: 22.7%. And when you stretch it out over three years, the average hedge fund has gained either 34.3% (CST) or 34.5% (HFR). Vanguard? 38% and change.