A recent note from Bridgewater Associates, the largest independent hedge fund in the world, seems to support the view that most hedge funds aren't worth the high fees investors pay. Bridgewater's evidence comes from the high correlation the majority of hedge funds have with the stock market, especially since the Financial Crisis. In hedge fund speak, most funds are not delivering alpha (a return that's better than the market overall.)
Bridgewater's conclusion is fairly simple:
One of the primary appeals of hedge funds to institutional investors is the prospect of generating absolute returns. i.e. similar returns in up and down markets. However, we continue to see that hedge fund returns are dominated by beta, in particular, the return of equities. Since institutional investors already have a concentrated exposure in equities, hedge funds have not been a good diversifier.
Bridgewater Daily Observations on Hedge Fund Returns and Beta