Gradually problems emerged. Hedge funds did not consistently deliver alpha, and returns were disappointing – in some periods lower than the broader equity market.1 Average returns dropped from 18.3 per cent per annum in the 1990s to 7.5 per cent in the 2000s.2

Investment genius was always little more than a short memory and a rising market. Edwardian novelist Max Beerbohm was vindicated: ‘The dullard’s envy of brilliant men is always assuaged by the suspicion that they will come to a bad end.’

But investors still chased yesterday’s returns. The focus now shifted to diversification, using hedge funds to balance the risk of traditional investments. ...

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