Another great article - thank you Nicolas. I spent two years running funds of hedge funds from London. We invested in all the major strategies from California to Tokyo. Like you, I detected that I could replicate most, at much lower costs.

Despite that, the majority of HF managers I encountered proclaimed themselves intellectually superior to long-only managers, and attempted to justify egregious (*) fees that way. With few exceptions (a fixed income arbitrage manager in Hong Kong stood out, for example), their claims were wholly unjustified.

A suggestion on the hindsight bias issue: use the standard statistical out-of-sample technique. In this case, pick the ratio of S&P500:cash on volatility matching criteria using only the first 15 years of data, and then see how the subsequent 5 years perform.

(*) One NYC equity market neutral manager was charging 5/50. I assume this was just to see if anyone was stupid enough to accept that.

Final thought: I was amazed to read in your article that there are still index managers who permit "backfilled" performance. This just invites self-selection bias.