Investors are returning to hedge funds. That may be unwise

Superheroes aresp useless when times are good. If Gotham was a safe and pleasant place, Batman would probably just spend his days relaxing in a mansion upstate. Superman only ducks into a phone booth to reveal his blue-and-red lycra when the bad guys are holding someone up at gunpoint.For the best part of a decade, financial markets were mostly serene. The & 500 index, the leading measure of American stocks, climbed steadily higher from 2010 to 2020. With expected interest rates edging lower and lower, bond prices also floated mostly up. Investors worried about missing out on the bull market of a lifetime, not about whatever risks lay around the corner. The circumstances were thus abysmal for institutions that aim to be useful in turbulent times, such as hedge funds. They often seek returns that are uncorrelated with the broader stockmarket, in order to ease the blow an investor’s portfolio might take when markets fall. In volatile markets, a superhero manager—call him hedge-man—is supposed to swoop in and protect investors from losses.