They under perform compared to the market as a whole but the people who put their money into a hedge fund don't care about that. They are not able to get the same returns a hedge fund can get on their own.
You also need to think about opportunity cost. While many smart people can do the research and figure out how to maximize returns, often it's worth the lower return to to have to worry about it. The time you would spend micro managing the investment just may not be be worth it to many people. Their time is better spent doing other things.