HEDGE funds employ the cleverest people in the world to exploit the opportunities that other managers miss. That is why they deserve their high fees—or so the story goes. That story is getting harder and harder to believe. In the first quarter of the year the average fund lost 0.8% after fees, according to Hedge Fund Research, an index provider. That follows a loss of 1.1% for the average fund in 2015, and a gain of just 3% in 2014. In other words, the average investor has earned a cumulative 1% since the start of 2014.

While clients have made do with the crumbs, the managers are still dining well. They get annual management fees of 2% or so, however the funds perform. Those that have done well have earned performance fees on top. All told, managers will have earned a lot more than their clients over the past couple of years.

Market conditions have been difficult for the hedge-fund titans. Sudden shifts between “risk-off” and “risk-on” markets, such as the market turnaround in February, are very hard to time. Official intervention in the markets, either through central banks or regulatory action, can also blindside the savviest investors. In January Martin Taylor closed down his Nevsky Capital fund, citing economic nationalism, the poor quality of data in China and India, and less transparent markets as reasons for his decision.

Dan Loeb, who runs the Third Point hedge fund, told clients in a letter in late April that recent months have seen “one of the most catastrophic periods of hedge-fund performance that we can remember”. Mr Loeb says many hedge funds were convinced that China would be forced to devalue the yuan early this year; it didn’t. Others backed big technology stocks like Apple and Netflix; they have underperformed. And some fund managers have lost out because of events in the pharmaceutical sector: the collapse of the Allergan-Pfizer merger and the plunge in Valeant’s share price.

Individual funds have their ups and downs. It is unfair to judge fund managers over the short term. So what about the longer run? In 2007 Warren Buffett, the investment guru who heads Berkshire Hathaway, a conglomerate, struck a $1m bet with Protégé Partners, a fund of hedge funds, over whether a hedge-fund portfolio would beat the S&P 500, after fees, over the subsequent ten years. As the chart shows, with around 19 months to go, Mr Buffett seems almost certain to collect. He drummed the point home at Berkshire’s recent annual meeting, saying, “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”

Defenders of hedge funds would say that the S&P 500 is not the best benchmark. Instead of aiming for the highest total return, managers use their skill to limit risk and deliver a more consistent performance. Even in this respect, however, hedge funds have lagged a long way behind a typical institutional portfolio comprising 60% American equities and 40% Treasury bonds.

It is not too difficult to figure out why. In a world of low interest rates, low bond yields and low dividends, the fees charged by hedge funds simply take too big a bite out of gross returns to leave much for clients. The golden age of hedge funds was in the 1990s, when the likes of George Soros delivered double-digit returns every year. Pension funds and endowments still have a dim memory of those days; that is why they hope hedge funds will act as a deus ex machina and deliver the outsize returns needed to fund the promises they have made. They have been repeatedly disappointed; some, such as CalPERS, a giant Californian pension fund, have liquidated all their investments in the sector.

All the statistics in this article refer to the average hedge-fund return; of course, there will always be managers who perform much better than average. But how to spot them in advance? If it were easy, then why would anyone give money to below-average managers? It will always be possible to find managers who have earned exceptional returns in the past, just as some people actually did back Leicester for the English football title at 5000-to-1. That doesn’t mean you’d pay good money for the same punters’ tips on the Kentucky Derby.

There is no doubt that many hedge-fund managers are extremely clever and work diligently at ferreting out profitable opportunities. But are there enough opportunities to sustain an industry with 10,000 individual funds and $2.9 trillion of assets? Nowhere near.

Economist.com/blogs/buttonwood