S&P 500 outperformed average hedge funds in 11 of 15 years through mid-2025 despite fees

The S&P 500 has consistently demonstrated superior performance compared to the average hedge fund over extended periods, a trend that underscores the challenges faced by active managers in beating passive benchmarks. Data from the American Enterprise Institute highlights that the index outperformed the typical hedge fund in 11 of the past 15 years, even before adjusting for the often substantial fees associated with hedge fund investments. This pattern raises profound questions for investors about the value proposition of high-cost active strategies in an era dominated by efficient markets and low-fee indexing.

The Historical Edge of Passive Investing

Over the long term, the S&P 500 has proven to be a formidable benchmark, often leaving active hedge fund strategies in its wake. Consider the decade from 2008 to 2017, a period marked by the global financial crisis and subsequent recovery. During this stretch, a simple, unmanaged S&P 500 index fund delivered returns that far exceeded those of a selection of high-profile hedge funds, net of fees. This outcome was famously illustrated in a well-documented wager where the index’s performance netted a compound annual growth rate significantly higher than its active counterparts, emphasising the drag imposed by management expenses.

Extending the lens to the past 15 years, the data paints a similar picture. From 2010 through 2024, the S&P 500 achieved a cumulative total return of approximately 256% for the 2010–2019 decade alone, with annualised gains of 14%. This momentum carried into the 2020s, where year-to-date figures as of mid-2025 show continued strength, with cumulative returns exceeding 118% since the start of the decade, translating to an annualised rate of around 15%. In contrast, average hedge fund returns have lagged, with many funds struggling to match these benchmarks amid volatile market conditions.

One key factor in this disparity is the fee structure. Hedge funds typically charge a “2 and 20” model—2% of assets under management plus 20% of profits—which can erode returns substantially. Even before these fees, the raw performance edge of the S&P 500 in most years suggests that active stock-picking and market-timing efforts frequently fall short. When fees are factored in, the gap widens dramatically, making it rare for hedge funds to deliver net outperformance over multi-year horizons.

Key Periods of Outperformance

To dissect this further, let’s examine specific intervals within the 15-year window. In the post-financial crisis recovery from 2010 to 2015, the S&P 500 surged with annualised returns north of 15%, driven by accommodative monetary policy and a rebound in corporate earnings. Hedge funds, often positioned defensively or in alternative assets, captured only a fraction of this upside. Similarly, the bull market of the late 2010s saw the index propelled by technology giants, with total returns in the 2010–2019 period reaching 256%, as noted in historical analyses.

The 2020s introduced new dynamics, including the pandemic-induced volatility and subsequent inflation concerns. Yet, even here, the S&P 500’s resilience shone through. For instance, from 2020 to mid-2025, the index’s annualised return stood at 15%, buoyed by sectors like technology and consumer discretionary. Hedge funds, while occasionally capitalising on short-term dislocations—such as the 2018 market dip where some posted modest gains amid a 4% S&P 500 loss—have generally underperformed on a net basis.

A notable exception occurred in 2018, when hedge funds, on average, declined by about 4%, but this still edged out the S&P 500’s performance that year, marking a rare victory. However, such instances are outliers; over the broader 15-year span, the index’s consistency prevails.

Why Hedge Funds Struggle

Several structural and behavioural factors contribute to this persistent underperformance. First, the efficient market hypothesis posits that stock prices reflect all available information, making it exceedingly difficult for active managers to gain an edge through superior analysis. The S&P 500, as a broad-market index, benefits from diversification across 500 large-cap companies, mitigating the risks of individual stock selection that hedge funds often undertake.

Moreover, concentration in mega-cap stocks has amplified the index’s returns. Over the past decade, the top five constituents—predominantly technology leaders—have contributed disproportionately to gains, adding trillions in market capitalisation. From 2015 to 2020, these leaders rose 288%, while the remaining 495 stocks gained just 23%. This “Magnificent Seven” effect, where a handful of high-flyers drive overall performance, has left many hedge funds, which may avoid such concentrations or bet against them, trailing behind.

Research from sources like Morningstar reinforces this: over three decades, a strategy of simply holding a basket of stocks without adjustments outperformed active tinkering. Similarly, only about 15% of US active funds beat the S&P 500 over the past decade, according to Portfolio Adviser data from 2024. For hedge funds specifically, a 2023 study by Global Investment Report found that even the top 50 funds outpaced the index by just over 3% over five years—a slim margin that fees could easily erase.

Investor sentiment, as gauged by credible sources like Goldman Sachs, has turned cautious on hedge fund picks. In early 2022, the firm’s analysis noted that popular hedge fund stocks lagged the S&P 500 by 21 percentage points over a 12-month period, the worst stretch in two decades. This sentiment persists into 2025, with analysts labelling hedge fund performance as underwhelming amid concentrated market gains.

Implications for Investors

For institutional and retail investors alike, these trends advocate a reevaluation of portfolio construction. Passive vehicles tracking the S&P 500 offer low costs—often under 0.1% annually—allowing investors to capture nearly all market returns. In contrast, hedge funds’ high fees demand consistent alpha generation, which history shows is elusive.

Looking ahead, analyst-led forecasts suggest the S&P 500 could maintain its edge if US economic growth remains robust. Models from firms like Morningstar project annualised returns of 8–10% for the index over the next decade, assuming normalised inflation and earnings growth. Hedge funds, to compete, would need to navigate geopolitical risks and sector shifts more adeptly, but past performance tempers optimism.

That said, not all active strategies are doomed. Select hedge funds with specialised mandates, such as those focusing on quantitative models or niche markets, have occasionally outperformed. A Seeking Alpha analysis from 2021 indicated that trading the top 10 stocks held by 40 large hedge funds yielded 22.3% annualised returns from 2008 to 2021, surpassing the S&P 500’s 10.5%. Yet, this requires precise replication and overlooks fees, making it more theoretical than practical for most.

Broader Market Context

Comparisons extend beyond hedge funds. Over 15 years, the S&P 500 has trounced international benchmarks, gaining over 360% compared to 58% for developed markets ex-US and 33% for emerging markets, as per historical ETF data. This US dominance, the longest on record, further bolsters the case for domestic indexing.

In a nod to dry humour, one might say that in the race against the market, hedge funds often resemble sprinters burdened by lead weights—fees being the heaviest. But the serious takeaway is clear: for long-term wealth accumulation, the simplicity of the S&P 500 often trumps the complexity of active management.

This table summarises key periods, drawing from dated analyses as of 2025-08-14. Investors should weigh these insights against their risk tolerance and objectives.

References

• American Enterprise Institute. (n.d.). The S&P 500 index outperformed hedge funds over the last 10 years—and it wasn’t even close. https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/
• Business Insider. (2022). VIP hedge fund stocks worst performance relative to S&P 500 ever: Goldman. https://markets.businessinsider.com/news/stocks/vip-hedge-fund-stocks-worst-performance-relative-sp500-ever-goldman-2022-2
• CNBC. (2019). Hedge funds beat the S&P 500 for the first time in a decade. https://www.cnbc.com/2019/01/08/hedge-funds-beat-the-sp-500-for-the-first-time-in-a-decade.html
• Hedge Think. (n.d.). S&P 500 vs hedge funds. https://hedgethink.com/s-p-500-vs-hedge-funds/
• Hedgeweek. (2023). Top 50 hedge funds outpaced S&P 500 by more than 3% over past five years. https://www.hedgeweek.com/top-50-hedge-funds-outpaced-sp-500-more-3-over-past-five-years/
• Morningstar. (n.d.). What beat the S&P 500 over the past three decades? Doing nothing. https://www.morningstar.com/stocks/what-beat-sp-500-over-past-three-decades-doing-nothing
• Portfolio Adviser. (2024). The 15% of US funds that beat the S&P 500 over the past decade. https://portfolio-adviser.com/the-15-of-us-funds-that-beat-the-sp-500-over-the-past-decade/
• Seeking Alpha. (2021). Outperforming the S&P 500: Trading top 10 hedge fund stocks. https://seekingalpha.com/article/4416365-outperforming-s-and-p-500-trading-top-10-stocks
• 24/7 Wall St. (2025). 3 ETFs that continue to beat the S&P 500. https://247wallst.com/investing/2025/07/10/3-etfs-that-continue-to-beat-the-sp-500
• X platform: Charlie Bilello – https://x.com/charliebilello/status/1699404323858334137
• X platform: Liz Ann Sonders – https://x.com/LizAnnSonders/status/1286266247580200960
• X platform: Eddy Elfenbein – https://x.com/EddyElfenbein/status/1904934575156949046
• X platform: Jon Erlichman – https://x.com/JonErlichman/status/1943400865051677052
• X platform: unusual_whales – https://x.com/unusual_whales