Activist: The Bullish Case for Hedge Funds

Hedge fund managers have an advantage over those who hold the types of positions mentioned above. First, as with a sales rep, you always know how a hedge fund manager is doing. With the exception of managers that dabble in private equity or illiquid assets, which are more difficult to manage on a daily mark-to-market basis, any hedge fund investor could get a daily report on how a manager is performing.

And hedge funds -- even the big ones -- are still small shops. If a fund has a good year or a bad year, its manager, whether it's Stevie Cohen or Bill Ackman, gets the credit or the blame. They don't get to punt responsibility to a foreign office or a snowstorm that kept away retail shoppers.

The second advantage hedge fund managers have over others when it comes to their compensation is that their performance is "real" at the end of each calendar year. Simply put, the market value of your portfolio this year gets measured against last year's market value.

Whether or not these profits were aided by leverage, hedge fund managers must perform in order to be compensated. While others can use their political skills to keep their jobs, hedge fund managers have to live with their fund's performance and the consequences that performance brings.

After a disastrous 2008, the big commercial banks are holding back recently injected capital from taxpayers to pay out year-end bonuses. However, few hedge funds (with the exception perhaps of the 10% that made money this year) will pay out bonuses.

What's more, many of the hedge funds that lost money for their investors this year adhere to "high-water marks." This means they have to make back their 2008 losses in 2009 before they are eligible for future bonuses. Investors get made whole and their managers only get bonuses when they actually deserve them. Citigroup investors sure wish they could get that kind of arrangement.