Hedge funds underperform the index because hedge funds exist. I'm going to circle back to what I originally said. The alternative reality of zero hedge funds i

Hedge funds underperform the index because hedge funds exist. I'm going to circle back to what I originally said. The alternative reality of zero hedge funds is not a reality that can possibly exist. The reason it can't exist is because the lack of hedge funds will create edge in the market, which will incentivize the creation of hedge funds (or other trading companies). So, given that zero hedge funds is not possible, then what is the best thing for society? The answer is that we want the best and most efficient hedge funds to extract all available edge with the minimum possible resource input. Once this happens, we achieve perfect competition and new talent no longer had an incentive to perform this activity and can go and do more useful things for society. This is the value add of hedge funds in our society. If we have one good hedge fund that extracts all edge, then the thousands of other would-be investors and traders can now go off and be scientists or engineers.