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Activist investors have a mixed reputation. Often they are considered to be nothing more than a white-washed version of the corporate raiders of the 1980s. Warren Buffett (Trades, Portfolio), however, believes they can sometimes serve a useful purpose. In an interview with Fortune in October 2015, the Oracle of Omaha took some time to espouse his views on activist investing, and how different investment vehicles go through varying periods of popularity.
A good battering ram
So although Buffett believes most activist investors are motivated by short-term gain that isn't necessarily in the long-term interests of the company or its shareholders, they can be a useful battering ram in cases where management is truly bad. Then he went out of his way to contrast this approach with his own, saying Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is run for the shareholders who are going to stay with the business, not those who are trying to sell their stock.
He then moved on to a more general point concerning the extremely generous fee structure paid out to the partners at activist hedge funds. Traditionally, active managers in the hedge fund industry are paid on a "two and twenty basis," that is, they receive 2% of all assets under management and 20% of the return. Ostensibly, this structure is supposed to incentivize managers to maximize returns. In practice, however, this means that if you can attract enough money, the 2% begins to eclipse the 20% in importance. Buffett pointed out that if you have $20 billion in assets under management, that equates to a 2% fee of $400 million - before performance.