Despite all their resources, the average hedge fund was soundly beaten by simple index funds in the first 5 years after the financial crisis. But that all changed this year as managed funds are outperforming broad market indices. And one portfolio manager insists the new trend will continue.

In 2008, Warren Buffett famously bet Protégé Partners’ Ted Seides $1 million that an S&P 500 (^GSPC) index fund will outperform Seides’ pick of five hedge funds over the following 10 years. In the first 5 years, Buffett was soundly in the lead.

Yet in the first five months of this year, the average hedge fund gained about 3%, slightly better than the returns of the S&P 500, according to data compiled by Credit Suisse.

“If you look at the trailing 5 years…hedge funds underperformed just the broad market indices,” said Ethan Powell, chief product strategist at Highland Capital. “We think that time is over.”

Highland Capital, which has all of its $21 billion invested in actively managed funds, recently launched several ETFs that track the performance of hedge funds. The ETFs were constructed with Hedge Fund Research, the firm behind several hedge fund indices such as the HFRX and HFRI.

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Many tracking ETFs rebalance their holdings with changes in 13F forms, quarterly reports filed by hedge funds as required by the SEC. But since those documents have a filing deadline of 45 days after the end of the quarter, the lag can be as much as 4 1/2 months from the time a stock is purchased until the position becomes public knowledge, notes Powell. He claims Highland’s hedge fund ETFs are different because they are based off of HFR’s indices.

Although the broader market is gearing up for a Fed rate hike as soon as later this year, Powell isn’t particularly worried for hedge funds.  He says they are generally short exposure to higher rates.

“We don’t think you’re getting compensated for assuming that kind of risk,” Powell said. “That’s largely hedge fund consensus and [they are] really well distancing themselves from rate risk.”

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