Hedge funds are making a comeback, but don’t count on the market-stomping returns that were synonymous with hedge funds prior to the economic meltdown. With lower returns and less risk, the new hedge funds may fill a new role in many portfolios.

The year 2008 marked the peak of the financial crisis for hedge funds, with the average fund losing 19%. A combination of losses, client withdrawals, and liquidation of certain funds led to a nearly twenty-five percent decrease in the size of the hedge fund industry.

Hedge funds however are back in the black in 2011, but are no longer beating the markets. According to Hedge Fund Research, the average yearly fund earnings were 20% and 10.3% in 2009 and 2010, respectively. These numbers were far below the S&P 500 index levels of 26.5% and 15.1% for the same years.

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For previous coverage of hedge funds in Advisor’s Journal, see Tax-Free Hedge Fund Investment: Private Placement Insurance (CC 11-39) & Hedge Fund Must Now Register with the SEC Under the New Wall Street Reform Act (CC 10-45).