Activist: The Bullish Case for Hedge Funds

The one group of investors that's been vilified more than any other by the business press and government officials alike in 2008? Hedge fund managers.

After years of rapid growth in terms of both assets and numbers of funds in operation, the hedge fund industry has taken a PR black eye this year. Media reports would have you believe that the industry is about to collapse in size, see its revenue drop dramatically through fee reductions and become heavily regulated to protect unsuspecting investors from another Bernie Madoff scam.

Hedge funds certainly make an easy target. They've had a bad year, along with every other retail and institutional investor. But the industry is about to grow dramatically over the next five years. This coming year will mark the beginning of the next wave of this industry's growth.

The 12 months of 2008 have proved an abysmal year, and every investor can't wait to be done with it. While hedge fund managers have done terribly, (with the exception of maybe Bill Miller) no one in the media seems to criticize the mutual fund managers or other wealth advisors for lousy performance.

It seems to be an unstated opinion in many articles that hedge fund managers should know better than other investors. One simple reason for this, a reason that draws endless attention and criticism, is hedge fund manager compensation. It's true that the best-performing fund managers over the last few years have been well compensated.

I don't have a problem if a hedge fund manager, the CEO of Yahoo! (YHOO) or the head of risk management at Citigroup (C) gets paid boatloads of compensation year in and year out, on two conditions:
(1) they should only be paid well based on their direct contribution to the performance of their firms, and
(2) that performance should be "real" performance, meaning that there is real value created, not some illusory accounting profit.