I think you are misunderstanding what many (maybe most) funds actually say they are offering. The investment is often positioned as an asset class with low corr

I think you are misunderstanding what many (maybe most) funds actually say they are offering. The investment is often positioned as an asset class with low correlation to other asset classes. Whether they actually offer this or not is a different story but many funds are not out promising to beat the S&P 500 every year. Indeed if you look at something like REIF from RenTech they are trying to offer lower volatility than investing the index itself. It should be noted that many (if not all) investors in hedge funds already own significant diversified stock holdings. They likely already own other asset classes with less correlation to the stock market like certain types of real estate. Just to pick a practical example from recent headlines. Elliott Management undoubtedly points out to potential investors that buying sovereign debt and litigating defaults has little correlation with the S&P 500. So when is building a truly diversified global portfolio an allocation to hedge funds (or PE or VC) is often looked at through the lens of correlation, and not necessarily absolute return relative to the S&P 500.