The stock market has soared this year, but for hedge funds in 2013, gains haven't been forthcoming. One report puts the average return for hedge funds in 2013 as of November at just 7%, quite a bit less than the Dow Jones Industrials (^DJI 0.00%) and the broader market. Given how much these professional investors get paid, their underperformance is particularly surprising.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, explains the headwinds that hedge funds have faced. Dan notes that some hedge funds blame government intervention in various markets, ranging from the bailouts in General Motors (GM 4.16%) to broader interest rate policy that sent PIMCO Total Return (BOND 0.29%) to losses for the year even taking interest into account. Dan also points out the number of bad bets that some hedge-fund and private-equity investors have made, with Bill Ackman's bad calls on J.C. Penney (JCPN.Q) and Herbalife (HLF 3.17%) being just one example. In the end, Dan concludes that one bad year doesn't mean hedge funds are a bad bet forever, but it does show the value of low-cost index investments over time.