From January 1995 to April 2006, the HFRI Fund Weighted Composite Index (HFRI) returned 10.97% a year after fees, according to a 2006 Yale working paper. The S&P 500, an index of large US companies, returned 11.58% a year with dividends over the same months.
HFRI is a hedge fund average compiled by the data firm Hedge Fund Research (HFR). Set against a stock index, it is not a fair fight. This guide sets out two published hedge fund records, shows how hedge fund data can flatter the funds and builds a fairer yardstick.
Do hedge funds beat the market? In both windows measured here, a published hedge fund index returned less than the S&P 500. The hedge fund indices also carried much less stock market exposure, so a fair comparison adjusts for it. Adjusted, the answer splits: one window is too close to call and the other, on a different sample, favoured the funds.
From January 1995 to April 2006, the HFRI composite returned 10.97% a year against 11.58% for the S&P 500. From January 2022 to December 2025, the Barclay Hedge Fund Index returned 5.5% a year against 11.0% for SPY (the S&P 500 exchange-traded fund, or ETF).
Data biases can lift a hedge fund average. In one database, the average fund return fell from 16.45% to 8.98% a year once closed funds were added and backfilled returns removed.
Matched to its stock market exposure, the 2022 to 2025 index trailed by 1.2 points a year, a gap that 48 months of data cannot tell from zero. A similar test on the backfill-removed sample from the 1995 to 2006 database, a different series from the index, measured +3.04 points a year.
How the question is measured
A comparison needs three things named: an index, a benchmark and a window. The benchmark here is the S&P 500 with dividends. The two windows are January 1995 to April 2006 and January 2022 to December 2025.
A hedge fund is a private fund that can bet against prices and borrow to invest. Our guide to what a hedge fund is explains how one works.
Two published indices supply the hedge fund returns. Both average the funds that choose to report to a data firm. Both count every fund equally, so a small fund weighs as much as a large one.
HFRI Fund Weighted Composite Index. HFR's average of reported hedge fund returns, after all fees. It covers four single-manager strategies and leaves out funds of funds, which invest in other hedge funds. Funds report to HFR voluntarily and must pass size and track-record tests.
Barclay Hedge Fund Index. BarclayHedge's average of the net returns of every fund in its database that reports in a month, again without funds of funds. BarclayHedge does not state whether funds that have closed stay in the history.
After fees, both indices show what investors in the funds kept. The S&P 500 figure is an index return, before any cost of owning it, so the 1995 to 2006 comparison sets a hedge fund figure after fees against a stock figure with no cost taken out. How hedge fund fees work is covered separately.
Hedge funds against the S&P 500, January 1995 to April 2006
Source: Ibbotson and Chen, Yale ICF Working Paper No. 06-10 (2006)
The orange bar is the HFRI composite at 10.97% a year. The grey bar is the S&P 500 at 11.58%. The three blue bars come from one database of 4,826 single-manager hedge funds, averaged with equal weights after fees.
They show how the same funds' record changes with the way the sample is built.
Survivorship and backfill bias
Survivorship bias arises when funds that close drop out of a database with their returns. An average of the funds still alive is then an average of the survivors. In this database, 2,020 of the 4,826 funds, 42%, had closed by April 2006.
Backfill bias arises when a fund joins a database after a good run and its earlier returns are added. In January 1995 the database held histories for 918 funds, but only 40 were reporting at the time. The other 878 were added later with their returns filled in. Only 5 of the 40 were still alive in April 2006.
The first blue bar averages only the funds still alive, with backfill: 16.45% a year. Adding the closed funds gives 13.62%. Removing backfilled returns gives 8.98%. The HFRI composite's 10.97% sits between the last two.
HFRI and Barclay are also built from voluntary reports. The size of any such bias in them is not measured here, but both biases lift a reported average, so a measured gap against the market is more likely too generous to the funds than too harsh.
Hedge funds against the S&P 500, 2022 to 2025
Source: BarclayHedge; YX Insights price data
BarclayHedge's public page lists the index's monthly returns from January 2022. Chart 2 sets each calendar year against SPY, with dividends counted and measured close to close.
The index fell less than SPY in 2022 (−8.2% against −18.2%) and rose less in 2023, 2024 and 2025. Compounded over the four years, the index returned 5.5% a year and SPY 11.0%.
The index also varied less. Volatility, how much returns vary from month to month, scaled to a year, was 6.3% for the index and 16.0% for SPY. Our guide to what volatility is explains the measure.
Why the comparison is not a fair fight
A diversified hedge fund index against a stock index is not a fair fight. Hedge funds hold short positions, cash and bonds as well as stocks, so they carry only part of the stock market's ups and downs.
Beta measures how far an investment moves when the market moves. From January 2022 to December 2025, the index's monthly return above Treasury bills (US government debt that matures within a year) moved 0.36 for each 1.00 in SPY's. The two had a correlation of 0.93.
Our guide to what stock beta is explains the measure.
A fair yardstick: a mix with the same exposure
Source: BarclayHedge; Kenneth R. French Data Library; YX Insights price data
The fair yardstick is a mix with the same exposure: 36% in SPY and 64% in one-month Treasury bills, rebalanced monthly. That mix returned 6.7% a year with volatility of 5.9%. The index returned 5.5% with volatility of 6.3%.
That gap is what the index earned beyond its market exposure, its alpha. It was −1.2 points a year over the 48 months. Its t-statistic, a test score, was −1.0. Scores beyond about ±2 are usually called statistically significant.
The 2006 study ran a similar test on its 8.98% sample, with stocks, bonds and cash as the exposures. It measured a stock beta of 0.33 and an alpha of +3.04% a year, significant at the 5% level. The sample, window and model differ from ours, so the two alphas are not a like-for-like pair.
Strategies carry different exposure. Long/short equity funds hold stocks long and short, while multi-manager hedge funds run many teams under one fund. A composite index averages across such differences.
What the record can and cannot show
Two windows. The measured series cover 136 months from January 1995 and 48 months from January 2022. This guide has no measured series for May 2006 to December 2021.
Two sources. The 1995 to 2006 figures come from the 2006 study, with the S&P 500 index as benchmark. The 2022 to 2025 figures are our calculation from BarclayHedge's monthly returns and our price data, with SPY as benchmark.
Averages. Each index weights every fund equally and includes only funds that report. It is an average of reported returns, not the return of any one fund or investor.
One test. The alpha uses 48 monthly returns and one source of exposure. A longer record is needed to separate a small gap from chance.
Against the S&P 500 itself, a published hedge fund index returned less in both windows. After matching stock market exposure, the 2022 to 2025 gap is too small for 48 months to separate from zero, while the 1995 to 2006 study measured a positive alpha on a different sample. The public record here is two windows. Neither settles the question for other years.
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Common questions about hedge fund returns
Do hedge funds beat the S&P 500?
In the two windows measured here, a published hedge fund index returned less than the S&P 500. The HFRI composite returned 10.97% a year against 11.58% from January 1995 to April 2006. The Barclay Hedge Fund Index returned 5.5% against 11.0% for SPY from January 2022 to December 2025.
What is survivorship bias in hedge fund returns?
Survivorship bias arises when closed funds leave a database with their returns, so the funds still alive look better than the average fund was. In one database for January 1995 to April 2006, 2,020 of 4,826 funds had closed. Averaging the survivors with backfill gave 16.45% a year, against 13.62% with the closed funds added.
What is a fair benchmark for a hedge fund index?
A fair benchmark has the same stock market exposure as the index. For the Barclay Hedge Fund Index from January 2022 to December 2025, that was a mix of 36% SPY and 64% Treasury bills. The mix returned 6.7% a year, against 5.5% for the index.
Which hedge fund indices are used here?
The HFRI Fund Weighted Composite Index is HFR's equal-weighted average of reported hedge fund returns after fees, tracked since 1990. The Barclay Hedge Fund Index is BarclayHedge's arithmetic average of the net returns of every reporting fund in its database. Both leave out funds of funds.
DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.