Hedge funds get away with it because no one who invests in a hedge fund is investing in the average hedge fund. The average hedge fund performs about as well a

Hedge funds get away with it because no one who invests in a hedge fund is investing in the average hedge fund. The average hedge fund performs about as well as the S&P 500. Ok. However, I doubt you could find anyone with money in a hedge fund (knowingly, at least - the investment of endowments and pensions are a different issue than the one I am addressing) who would claim to have invested in one with "average" performance. The upside of hedge funds is much higher than safer investment vehicles. That's why people keep using them. The issue is the same one that plagues law students going to schools with bad employment outcomes - people are completely capable of understanding likely outcomes and expected performance. They are even better at believing that they are the positive outlier.