"Performance Bonuses"?

I don’t know if you will consider me to be lacking self-control, call me a liar or call me a fool but I’m back!

I can’t continue my rants at the newspaper and the television. Certainly my wife won’t listen to me so I've decided that my only recourse is to resume writing this feckless blog.

The article below is really what sent me back over the edge. It describes the fees paid to hedge funds by New Jersey pension funds. The first article shows that the contract with the hedge funds provides not only for fees but also for “performance bonuses”. Twenty percent of investment returns exceeding six percent will be paid to the hedge fund as a “performance bonus”.

Upon reading this I immediately looked up the overall average returns on the Dow, the NASDAQ and S&P for the past year. They were 7.52%, 13.4% and 11.39% respectively!

What this means is that a monkey with a dart and the Wall Street Journal would definitely earn a "performance bonus" and it would only cost the pension fund an extra banana or two not the hundreds of millions of dollars which the hedge funds received.

What competent financial manager would agree to some arbitrary number to set as a goal to obtain a “performance bonus”? Shouldn't the goal have been set to exceed the overall yearly market averages?

And why was there not a disincentive in the contract if returns fell significantly below average market returns?

These are all obviously rhetorical questions because I think I know the answers and I am quite sure you do too!