This is important, and it fits with other research showing that hedge funds haven't performed well, net of costs, over long observation periods. CEM Benchmarking just published a study sponsored by NAREIT of actual performance realized by more than 300 U.S. DB pension plans over the 14-year period 1988-2011 (http://www.reit.com/sites/default/files/pdf/Asset%20Allocation%20and%20…).
The study showed that hedge funds have been the WORST asset class with gross returns averaging just 6.02% per year (lower than every other asset class except "U.S. other fixed income") but with investment costs averaging 125.1 basis points per year (higher than every other asset class except private equity). Net returns were dead last at 4.77% per year. Hedge funds were worse than all four categories of fixed income--meaning that pension funds could have diversified their equity allocations much more effectively while paying between one-third and one-seventh as much!
CEM Benchmarking estimated that the average pension fund would have IMPROVED its average returns by 2.1 bps/yr if it had REDUCED its hedge fund allocation by one percentage point, yet average allocations to hedge funds increased by 5.0 percentage points over the historical period.
Clearly the problem analyzed by this paper is an enormous one: institutional investors have piled into hedge funds, chasing past returns, and have paid hedge fund managers enormous piles of cash for what turns out to have been dismal "performance." We've got to put a stop to this.