Institutional investors that took the plunge into hedge funds during the past decade looking for alpha got more than they bargained for in 2008. Not only did most managers lose money in the subprime-mortage-induced market meltdown, many of them prevented investors from redeeming their capital by gating funds or creating side pockets for illiquid securities. Not surprisingly, when given the opportunity, investors pulled their money, withdrawing $285.7 billion from hedge funds in 2008 and 2009, according to Chicago-based Hedge Fund Research. But a recently published academic study indicates that they may have been too quick to pass judgment. In an article in the January/February issue of the CFA Institute’s Financial Analysts Journal, Yale School of Management finance professor Roger Ibbotson reported that in 2008 hedge funds made good on their promise of delivering alpha: returns above what the market itself would have given an investor. In fact, Ibbotson found....

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