Hedge funds are built on the idea that a smarter guy (and they are almost all guys; only 16.8% of managers are women) with a better computer can make miracles possible by uncovering inefficiencies in the market or predicting the future.
However, as Bloomberg Businessweek exposes the fact that in a market increasingly dominated by ultra-high-speed headline-reactions, centrally-planned divergences from fundamental realities, and clamp-downs on insider-trading, the 'edge' and scale of the BSDs has diminished - despite their ongoing belief in their own omnipotence.
Behold what happens when Hedge Fund viagra "expert networks" and "information arbitrage" is taken away, and everyone trades on the same information.
As one analyst noted, "any idiot can make a big return by taking a big risk," but the performance anxiety coupled with the lack of ability to get it (returns) up leaves hedge funds limp in the face of an inexorable rise in equity indices (long-only is the new long-short it would seem).
As Bloomberg concludes:
Let the industry’s recent underperformance serve as a reality check: No matter how many $100 million Picasso paintings they purchase, hedge fund moguls are not magicians. The sooner investors realize that, the better off they will be.