Hedge Fund Has-Beens

So over the last one, two and three years, just as the hedge fund industry has really taken off, those geniuses in designer glasses have done no better, on average, than your typical mom-and-pop investor in a completely passive stock market fund.

Of course many hedge funds did much better. But so, too, did many mutual funds. Forget 2% fees and 20% of the profit, the usual rake charged by the hedge fund crowd. People chasing these overpriced gimmicks could have just handed over 0.20% of their money to Vanguard each year and gone back to their yachts for an early cocktail. Behind all the secrecy and the conspiracy theories, hedge funds have turned out to be ... well, pretty dull.

There is, of course, no mystery to this. Early hedge fund managers were like the first people to take a metal detector to a deserted beach. They turned up all sorts of small buried treasures. Now there are so many treasure-hunters out there you can barely see any sand. What are the chances any Krugerrands remain undiscovered? It's the iron law of diminishing returns: The more people who chase an investment opportunity, the less profitable it becomes.

Another iron law is the ability of investors to forget. So can we rule out a "apocalypse" completely? Of course not. Some sort of financial shock -- whether from a hedge fund or somewhere else -- is bound to happen sooner or later. They always do. Gullibility and disasters are as guaranteed as diminishing returns.

But the hedge fund bubble certainly seems to be coming to an end. With a whimper.