Agree and disagree. Hedge funds are not supposed to “beat the market”. They’re supposed to deliver some beta (maybe) and some alpha (definitely). Outperform in bear markets and underperform in bulk markets. Unfortunately the average hedge fund does not even clear that low bar.
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Active has to outperform passive under two conditions: 1. Active has higher fees (basically always true) 2. Passive does not need to trade (not true, but can be approximately true in some sectors)
When passive trades (eg in index rebalances, issuance, buybacks, delisting, IPOs, reinvestment of dividends, coupons or maturing instruments) it may get bad prices, which creates opportunities for active to outperform, even in aggregate and after fees.
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It follows that active will normally underperform when little trading is required from passive (eg US large cap equities) and is more likely to outperform when passive has to trade more (eg small and mid cap, fixed income, real estate)
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