Hedge funds—which, as an asset class, are a scam—charge exorbitant fees in exchange for the sort of top-tier investment skill you supposedly can’t get with a dirt cheap index fund. A new study says that is bullshit.

The new paper, by two finance professors, examined just how much actual active management goes into hedge funds. (Active management, the constant buying and selling of holdings, is to be distinguished from passive management, which means just buying something and letting it sit in your portfolio.) Since anyone can easily buy all sorts of passive investment funds for relatively cheap fees—small fractions of a percentage point a year—it is presumed that hedge funds, which charge many, many times more in fees and promise to outperform the market as a whole or to offer less volatility than the market as a whole, are being actively managed by investment wizards whose skills are worth such a hefty price to investors.

Not so.

As CIO magazine reports, only about a fifth of the more than 5,000 hedge funds studied exhibited true active management of a sort different from what can be purchased on the cheap. And on top of that:

Furthermore, the study found nonlinear funds on average underperformed their not-so-active counterparts.

From 1995 to 2009, the study found nonlinear funds’ returns were 0.1% lower than those of linear funds. They performed even more poorly compared to market-neutral funds, falling 0.28% lower while featuring higher volatility.

What does this mean?

A) Most hedge funds don’t even act like hedge funds, and
B) The ones that do, do worse.

So what are hedge fund investors paying all that money for? Good question.

[Pic via]