Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching

True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.

Quick search shows current lock ups range from 6mo to 2yr. There are also some funds that have withdraw limits and short windows for doing so (I.e. once a quarter perhaps), but of course these tighter restrictions are only relevant for the funds that have the clout to implement them

There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser.

The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.

> It takes a long time to realize that your hedge fund is a loser.

it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.

Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.

If you don't heed this evidence now, you deserve to lose money to these funds.

The purpose of a hedge fund is to ‘hedge’ ie deliver alpha and not index beating returns. Obviously the fee issue is another layer.

That was the original idea. They realized that they could also run the risk equations in reverse and make index beating returns, at least in the short run, and pretend that they could also do it in the long run. Hedge funds got a reputation as overpowered mutual funds for the wealthy.

It's kind of like buying lottery tickets from a vendor and when you win, but he steals the winnings, you switch to another one.

Except, also, you don't actually ever see the tickets.

Depends on if there’s capital gains tax when leaving the firm.

> Ultimately, investors mainly care about the returns

Not quite. It also matters how and when returns are generated. Some vol funds make 1–3% a year on average, but they still manage billions because when markets crash, they (presumably) crush it — and that’s when investors need them the most