Bill Nygren's criticism of hedge funds

Bill Nygren manages the Oakmark (MUTF:OAKMX) and Oakmark Select (MUTF:OAKLX) mutual funds. He's a widely respected value-oriented stock picker, sometimes described as the next Buffett. In his most recent letter to shareholders, he lists three criticisms of hedge funds. Here they are in his own words:

Hedge funds, whose portfolios generally combine long and short equity positions, tend to achieve their best performance relative to the stock market during periods of declining stock prices. We believe that investors chasing recent performance are likely to be disappointed with hedge funds. First, the proliferation of hedge funds makes it much harder to argue that the industry is composed of just a handful of highly talented managers. Although some managers will continue to produce good results, as the hedge fund industry grows we believe the industry must trend toward mediocrity. Second, fee levels have stayed extraordinarily high and in many cases are increasing - in addition to a base fee that is higher than most mutual funds, hedge fund managers normally keep at least 20% of their investors' profits. And finally, most hedge funds compare themselves to the S&P 500, which has a negative return for the trailing five years, an unusual event that seems unlikely to recur.

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Nygren's full September letter to Oakmark shareholders is worth reading: it contains a comparison of Oakmark and his approach to fund management to Tiger and Julian Robertson's.
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