Returns for hedge funds are averaging just 2.8% this year, woefully below the S&P 500’s 11% run. But that hasn’t stopped investors from pouring money into the industry which posted a new capital record of $2.82 trillion according to Hedge Fund Research.

Barry Ritholtz, chief investment officer, at Ritholtz Wealth Management, weighed in on the pros and cons hedge funds can offer large institutions, such as pension funds. “It lowers the amount of contributions a state has to make to their pension funds and it creates a much bigger problem down the road because you have these expensive underperforming funds.”

Underperformance, says Ritholtz, can have big consequences. “That’s pretty much the reason CalPERS [the largest public pension fund in the U.S., with approximately $300 billion in assets] kicked all of their hedge funds to the curb.”

When CalPERS announced its decision to pull out of hedge fund investments it cited complexity rather than performance as detailed in this September statement https://bit.ly/16bKs3F.  Yet, it seems safe to assume that had hedge funds been outperforming for CalPERs the pension fund would have dedicated sufficient resources to manage and simplify those holdings.

demystify the product CalPers did acknowledge hedge funds are a viable strategy for some.

Whether you love em or hate em, hedge funds titans including Ray Dalio, David Tepper and Carl Icahn have made billions. “There are like 50 to 150 hedge funds, who over long periods of time, have shot it out of the park.” said Ritholtz.

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