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Hedge funds get bigger as returns get smaller

Hedge funds just keep getting larger and larger. Too bad their returns aren’t.

Money invested in these high-octane investment vehicles surged 17% to a record $2.6 trillion in 2013, according to a report from Hedge Fund Research Inc.

But Hedge Fund Research’s Fund Weighted Composite Index posted just a 9.2% gain last year. The S&P 500 surged nearly 30%. So investors could have enjoyed nearly three times the return by simply putting their money in a passively managed exchange-traded fund that mimics that blue chip index.

Hedge funds employ a broad range of sophisticated investment strategies aimed at beating the market without depending on the performance of the broader market. But hedge funds have taken heat in recent years, as high fees and lackluster returns have led some experts to question their value.

Even some legendary hedge fund managers couldn’t deliver last year. Bridgewater Associates’ $70 billion All-Weather fund , run by Ray Dalio, fell 3.9% for example.

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