Ted,
Regarding whether "the best and the brightest" succeed in making good investments, or only in extracting high fees from their investors, check out the paper "How Smart Are the Smart Guys?" published by Griffin & Xu (http://rfs.oxfordjournals.org/content/22/7/2531.short, and available at http://www.jgriffin.info/Research/smart.pdf):
"These findings indicate that hedge fund holdings and trading are not adding value on average. ... In terms of stock picking, there is some weak evidence that hedge funds outperform mutual funds on a value-weighted basis, but these superior returns are largely concentrated in the high price-to-sales (technology) sector in 1999 and 2000. ... Hedge funds exhibit no ability to rotate capital among different asset styles at opportune times and their average style selection slightly underperforms mutual funds.
Overall, we find that hedge funds seem to be no better at long-equity investment than mutual funds. Given that hedge funds generate higher turnover and trade in less liquid securities, our performance comparisons would look even worse if transaction costs were included. Back-of-the-envelope calculations using a standard hedge fund fee structure suggest that hedge funds are a worse vehicle than mutual funds over our sample period. In sum, our findings question the ability of hedge fund management to add value, particularly in the realm of long-equity investing."
The authors go on, "We predict that as data quality improves, more studies will begin to question the wisdom of hedge fund investment."
I'd love to know your thoughts.