Hedge Funds Head for Mediocrity

Alpha hedgie Ed Thorp beat the Street. Most of the new guys won't

Don Cravens / Time & Life Pictures / Getty Images

Mathematician Dr. Edward Thorp using his blackjack "system" to beat the house at the Tropicana casino in 1964.

In 1962, a government study of mutual funds revealed that they were, on average, average, or worse. This was an affront to many on Wall Street who assumed that, of course, professional investors beat the market. It was left to legendary investor Benjamin Graham to explain in a speech to securities analysts that "neither the financial analysts as a whole nor the investment funds as a whole can expect to 'beat the market,' because in a significant sense they (or you) are the market."

At the time, the pros controlled only 15% of the U.S. stock market (the figure is now more than...

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