In addition to attractive returns, many hedge funds claim to provide significant diversification for traditional portfolios. This paper empirically examines the return and diversification benefits of hedge fund investing using the CSFB/Tremont hedge fund indices from 1994-2000. We, like many others, find that simple regressions of monthly hedge fund excess returns on monthly S&P 500 excess returns seem to support the claims. The regressions show only modest market exposure and positive added value. However, this type of analysis can produce misleading results. Many hedge funds hold, to various degrees and combinations, illiquid exchange-traded securities or difficult-to-price over-the-counter securities. For the purposes of monthly reporting, hedge funds often price these securities using either last available traded prices or estimates of current market prices. These practices can lead to reported monthly hedge fund returns that are not perfectly synchronous with monthly S&P 500 returns due to the presence of either stale or "managed" prices. Non-synchronous return data can lead to understated estimates of actual market exposure. We employ standard techniques that account for this problem and find that hedge funds in the aggregate contain significantly more market exposure than simple estimates indicate. Furthermore, after accounting for this increased market exposure, we find that taken as a whole the broad universe of hedge funds does not add value over this period. With the stock market still near all-time high valuations, investors who view their hedge funds as protection from a market correction should consider this a potentially serious issue.