I can't figure out why hedge funds have suddenly become public enemy No. 1. Maybe it's just because my friends are always forwarding me articles that criticize such funds, but I can't help but feel like hedge funds have come under attack.

The typical article I read on the topic invariably describes such partnerships as "mysterious and risky investment vehicles for the super-wealthy." One is left with the impression that hedge funds are run by sinister men who go around kicking dogs, taking candy from babies, and making massively leveraged bets in the equity markets.

The fact that many hedge funds are making money in this lousy market seems to some to prove that these elitist funds are profiting from the misery of the small Main Street investor stuck with their sorry lot of underperforming mutual funds. As the manager of a hedge fund, I can tell you that most of these articles just aren't representative of the average fund.

The conspiracy theory
I picked up the March 31 issue of Fortune magazine recently, which contained two less-than-flattering articles about hedge funds. In the first one, Andy Serwer uses his best Stephen King prose to describe one hedge fund as "a $7 billion beast" and a "Wall Street monster" that "lurks" in the unsuspecting town of Westchester, Conn. I found Serwer's piece to be insightful and well-written; I just don't get the conspiracy angle.

In the same issue, Carol Loomis likens hedge funds to pirate ships where "wealthy investors outfit the crews and share the spoils with the crew." Again, I don't understand the outlaw motif, but I guess it could have been worse.

Carol Loomis, by the way, is a legitimate authority on hedge funds and an accomplished business journalist. She has edited Warren Buffett's annual reports for many years, and it was her seminal article in Fortune on hedge fund pioneer Alfred Winslow Jones way back in 1966 that helped to popularize the hedge fund concept.

Forbes magazine had less-kind things to say about hedge funds back in July 2001 in an article called "The $500 billion Hedge Fund Folly." Their conclusion then was that "hedge funds soak you with high fees and under-perform the market." In the 2001 article, Forbes proposed the following as a working definition of a hedge fund: "A hedge fund is any investment company that is unregulated, has limited redemption privileges, and charges outrageous fees." The author also enlisted the help of John Bogle, the Vanguard index fund czar, to make the case against hedge funds. Bogle obliged, noting that it is not realistic for investors to expect the hedge fund industry of more than 6,000 funds and $500 billion in assets to outperform the rest of the market over the long term.

This is a reasonable observation, and I don't necessarily disagree with him. Unfortunately, he then went on to pick a name at random from a hedge fund directory to disparage, saying: "I don't know what to do about Scion Capital, started by Michael Burry M.D. after leaving his third year of residency in neurology. He started it mostly with his own money, $1.4 million, and he's looking for more. His technique to manage risk is to buy on the cheap and, if he takes a short position -- I hope you're all sitting down for this -- it is because he believes the stock will decline."

The funny part is that the Dr. Burry mentioned in that article happens to be a friend of mine. Not only that, but he may be the finest money manager I know, and I have the privilege of knowing many outstanding professional money managers.

Let's just take a look at the performance of Burry's Scion Capital versus that of the Vanguard 500 Index (VFINX). From its inception in November 2000 through year-end 2002, an investor in Scion Capital would have enjoyed a 74.4% cumulative return, while the S&P 500 investor was down more than 36%. I should also point out that Scion's numbers are net of all fees and expenses. Also, Burry doesn't use leverage and only rarely shorts stocks. Instead, he prefers a concentrated portfolio of deeply undervalued stocks.

Michael Burry is also now managing over $65 million, so apparently he is not having any problems convincing people other than John Bogle that he knows what he is doing.

Hedge funds as alternatives
My point is not to hammer on John Bogle or Carol Loomis or anybody else. Bogle has been a great friend to the individual investor. He's definitely one of the good guys -- and we here at The Motley Fool have worked overtime to spread his gospel of low-cost index funds to individual investors.

That doesn't mean that he carefully considers everything he says, or that he doesn't have his own agenda. For him to pick a name out of a hat to make his point was simply wrong, and not conducive to a rational discussion. Michael Burry is an example of what is right in the hedge fund business, not what is wrong with it.

Bogle has a strong bias for index funds, which is fine. Index funds are great for investors who want to match the broad stock market performance with a minimum of frictional costs, but they simply can't protect your capital in bear markets. The Vanguard 500 Index has probably lost more money in absolute dollars than all hedge funds combined over the past three years. It isn't surprising that after three years of losing money, some people are looking for alternatives.

Hedge funds, like it or not, provide an alternative. Not every hedge fund will beat the market over an extended period of time, of course. Maybe even most of them won't, as is the case with actively managed mutual funds. But there are some great funds out there, run by honest and capable people.

There are surely some bad apples in the hedge fund world, let me be quick to say. No doubt there are guys running hedge funds who have no business managing money. But the same is true of mutual funds, or private account managers, or whatever. The hedge fund structure has advantages and disadvantages, as do mutual funds, closed-end funds, and any other investment vehicle. Even among hedge funds, the terms, fees, performance, and risk profiles vary widely from fund to fund.

It all comes down to the manager
The bottom line is that choosing the right manager is far more important than choosing the right structure. I was pleased to see that Carol Loomis' latest Fortune article makes this very point: Most investors don't earn the industry average, but rather they will prosper or suffer in proportion to the extent that they are invested with good managers. Whether we invest in mutual funds, hedge funds, or even if the money manager we choose happens to look back at us in the mirror, we need to choose wisely and carefully.

Zeke Ashton has been a long-time contributor to The Motley Fool and is also the managing partner of Centaur Capital Partners, LP, a money management firm in Dallas, Texas. Please send your feedback to zashton@centaurcapital.com. The Motley Fool is investors writing for investors.