If you’ve been reading articles about hedge fund performance over the past three years, you’re probably thinking index funds are better options for investors. Don’t let the increasing stock prices fool you. Equity hedge funds hedge around 50% of their exposure. It isn’t really appropriate to compare hedge fund returns to broad market indices that are 100% long at all times. The truth is that hedge funds on the average outperformed the market over the past five years. Unfortunately, hedge fund managers took around 47% of their total returns as fees (read the details here). Yet despite these huge fees, investors were still able to outperform the market by 2.5 percentage points per year.