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By Donald A. Steinbrugge, CFA, founder and CEO of Agecroft Partners, LLC.

The relative performance of the hedge fund industry has dominated a majority of asset classes over the past five years, marking one of the strongest stretches in the history of the industry.

As seen below, the HFRI Fund Weighted Composite Index has outperformed most liquid assets except for the S&P 500. However, this performance has been concentrated in a small number of stocks and most large-cap US active equity investors have significantly underperformed the broader index.

Most sophisticated public pension funds experienced enhanced returns

Unlike top endowment funds, which have had significant allocations to hedge funds for decades, most public pension funds did not begin developing direct hedge fund allocations until well after the 2008 financial crisis. Since then, many of the most sophisticated pension funds have established diversified, uncorrelated asset allocations, primarily funded by reallocating away from fixed income with a goal to enhance overall returns and reduce volatility. In the past five years, hedge fund indices have not only outperformed fixed income, but have also avoided the extreme declines seen in long-duration fixed-income investments.

Hedge fund performance is much higher for institutional investors than r......................

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