Only the Clients Can Fix Hedge Funds

Do hedge fund managers really want to flee their style prisons? Do they really want to rebel against the big, dumb institutional money and the consultants that come with it?

I don't think so.

The comfort of the style prison, where you don't have to learn new tricks, fits nicely with this new breed of manager that I see. These are managers who are content to beat each other or the benchmarks. They genuinely believe that if they go for high returns, the consultants will turn on them. They also think that if they "deviate" from their stated, mostly-tech game plan, the money will go away.

I have received an outpouring of email about my recent hedge fund column bemoaning the way the industry is going, almost all of it positive. People have been asking me how much of the mediocrity is the fault of the consultants. Very little, actually. Most of it is because the managers don't want to go scouting for capital and can't get started with enough money without the consultants. They tend not to know a lot of rich people or they think that if they start with $10 million or $20 million, it won't be enough.

More important, the whole business has become so institutionalized that you can see how hand-and-glove the seduction is. If I were to start a hedge fund today, I can see myself making some deal with Deutsche Bank to take $200 million in return for custody and trading. I simply would go into DB and say that my proprietary, low-risk, medium-return model focused on identifying mid-stage companies before they become large-capitalization companies, with an emphasis on balance sheet, ratio analysis and inventory turnover. Blah, blah, blah. I then would present 10 charts that would show how, if you had used my methodology, you would have been in the lowest-risk quadrant and the second-highest reward quadrant, the highest being reserved for those nut-job risk-takers "who get you and me" in trouble. I then would add that I would have a trading desk with a profit and loss that would be active every single day, chiefly with DB. I would demand 2% and 20% because of all of that trading.

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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail]. Listen to Cramer's RealMoney Radio show on your computer; just click here. Click here to buy Cramer's latest book, "You Got Screwed!" Click here to order Cramer's autobiography, "Confessions of a Street Addict."