Investors in hedge funds are likely to be paying for a product more like an index fund than a skill-driven market beater.

So finds a new study by Mikhail Tupitsyn and Paul Lajbcygier of Monash University in Australia, who looked at the evidence of 5,580 hedge funds, about half active and half now closed, between 1994 and 2010.

“The question at the heart of this study is simple: do most hedge fund managers generate returns through managerial skill? The answer, according to our work, is no. We show that most hedge fund managers are passive, not active,” they wrote.

“The majority of hedge funds exhibit linear 'alternative beta' (i.e. buy-and-hold) strategies ... Over the long run, we can be confident that the risk exposures of the majority of hedge funds are linear and aligned with the simple 'buy and hold' exposures of alternative beta portfolios.” 

Obviously, some defining of terms is in order here.

By passive, the authors aren’t suggesting that hedge funds are stealthily replicating the S&P 500 or some other index and then trousering fat fees. Rather that they are not fulfilling the promise of hedge funds as an alternative, instead producing pedestrian results, which mostly can’t be attributed to exceptional skill.

In this context a linear return would be what you might get out of the index, or beta as it is sometimes called, while a non-linear return is something not correlated with the index.

Alternative beta are strategies which attempt to replicate hedge fund risk/return results at a lower cost.

The authors argue that hedge fund investing is “justifiable” if two conditions are met: they do stuff average investors could not, and they generate extra value by so doing.

On those criteria, at least to judge by this study, hedge funds, well most of them, aren’t justifying the cost of admission.