The idea of a hedge fund is to deliver positive RISK ADJUSTED returns (hopefully at a high Sharpe ratio). They're not "beat the S&P 500 every year funds".
I'm not saying hedge funds as a whole have or have not delivered on that promise (you'd have to consult the historical track record), but comparing hedge funds' returns to the one year return of the S&P 500 is missing the point. Equities have been on an absolute tear recently, so I'd fully expect them to have outperformed hedge funds. In a flat or down period, HF's are likely to outperform.
Over a 10-20yr period, I'd expect equities to outperform partially because they're higher risk, and partially because of the very high fee structure of HF's. That doesn't mean they aren't a good part of a diversified portfolio (many of the most celebrated asset managers like Swensen view alternative asset classes like HF's, PE, and VC as important), but the point is moot for most retail investors who won't have access to HF's, especially on a diversified basis.
