Why can't hedge funds just buy ETFs that follow the S and P 500 and make returns off of that (8%)?

That would remove the “hedge” part of hedge funds…

Most hedge funds utilize 3 tools:

1. Shorting (not do-able if you just buy & hold $SPY)

2. Leverage (margin)

3. Derivatives (options, futures, etc)

Also, it’s becoming more popular for hedge funds to charge “fulcrum fees”* instead of the legacy 2 & 20 fees. What this means is that hedge funds only charge for “alpha”, so with fulcrum fees, hedge funds only collect fees when they perform ABOVE the market (only when they beat the S&P 500). In your question then, fulcrum fees would yield ZERO fees in your example.

* A Hedge-Fund Fee Plan That Only Charges for Alpha