Hedge funds underperformed a simple equity/debt index over the last 17 years by 1.27% once their hefty fees were taken into account, according to an assessment of major international investors.

CEM Benchmarking analysed the realised hedge fund portfolio returns from 382 large global investors in the 17 years up to 2016, and found that only 36% of portfolios examined beat the company’s equity/debt optimised index over the period after taking account of fees.

Before fees, the average outperformance over the period was 1.45%, but this was wiped out by costs of 2.72%, CEM said.

The figures came from its Hedge Fund Reality Check survey, as well as results of a one-off survey of 27 leading pension funds.

The investors in the study typically paid 2.2% in direct hedge fund fees in 2016, and 3.26% for those using fund-of-funds structures. Funds-of-funds underperformed by 2.11% after costs over the 17-year period, CEM said.

Alexander Beath, senior research analyst at CEM and lead author of the study, said: “Although some investors have invested in hedge funds because they are supposedly uncorrelated, our research suggests that most hedge funds, at the total portfolio level, behave remarkably like simple equity/debt blends.”

Many pension funds could buy a passive alternative at a low cost with very similar risk and return characteristics, he said.

Back in 2000, CEM Benchmarking said only around 2% of large institutional investors had money invested in hedge funds but this had grown to 50% by 2016.

Of the 36% of hedge funds that did beat CEM’s benchmark after costs, the company said these investors “generally had long histories with hedge funds, portfolios with lower correlation to equity/debt blends, and lower-cost direct hedge funds”.

CEM hedge fund returns before and after fees