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hedge funds and private equity get a lot of their returns from being highly levaraged. back in the day long term capital management was making double digit gains on bond trading and single digit gains on each trade. but with the magic of levarage it turned into 20% plus gains per year for a few years.
hedge funds can short so when the market is tanking 20% in a bear market a good hedge fund manager can make a ton of cash
private equity gets a lot of it's investment money from pension funds and is kind of like Enron where they have SPV's. Strategy is buy up a company in trouble with very little debt. use a lot of borrowed money as levarage. transfer the debt to the company and take a ton of money as special dividends and management fees, etc. fix the company and then pawn it back in an IPO like JCrew and come out with 20% plus annual gains
the law of large numbers is the only thing working against them. when you manage $1 billion in capital it's easy to move money around. if you are like Fidelity it takes months to buy and sell your positions even in the biggest companies and that is when returns suffer.
but you can't compare index investing to hedge funds and other alternative investments. with the sp500 index fund your gains depend a little on dividends and mostly on others bidding up the stock you already own to new highs. with private equity and hedge funds a lot of their investments generate real cash on a regular basis at amazing rates of return
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