There has been a lot of press lately about institutional investors abandoning hedge funds. Conventional wisdom in finance tells us to compare fund
performance with a benchmark, usually the S&P 500 index. That’s always a
good idea, but the measure you use makes a lot of difference. The standard for
decades has been rate of return. For example, the total return for the index in
a given year might be 30% including price appreciation for the year plus
dividends. Using that measure, few funds or investing strategies can beat
benchmarks. That’s why conventional wisdom teaches us to buy a broad index and
never sell until we retire. The assumption behind the philosophy is that
earning a higher percentage means investors will have more money at the end of
their investing life cycle.
