To Martin Lipton, hedge funds and other pesky corporate gadflies are a problem. Hedge funds band together to attack a company. They influence analysts and the press and disrupt the business. They force the company to sell assets and buy back stock, pushing the management to focus on instant share price boosting instead of long-term business building. Then they sell out, sometimes leaving the firm an empty shell.

As Mr. Lipton, a distinguished attorney who advises companies in contests with shareholder activists, describes it, managements take excessive risk to ward off activists who demand unsustainable growth in corporate earnings. Long-term investors such as index mutual funds, which have no choice but to hold the companies in a specified index, are left holding the bag.

The drop in hedge fund assets and the financial crisis have not significantly reduced activism, Mr. Lipton said, speaking at an event held by the New York City Bar.

For their part, activists say they take on inept or corrupt chief executives, forcing companies to reform. By doing so they benefit long-term investors like index funds, which otherwise continue to bear the loss to share price caused by these executives.

Both points can be valid. Many activists look to gain from a quickie price boost by engineering an asset sale or merger that may not be good for the business over time. But some corporate executives really are bad and need to be confronted. Click for related HedgeFundSmarts.com story

So why don't index funds themselves do some of the confronting? After all, they have larger stakes than hedge funds and hence more say. That's a point that Leo Strine Jr., vice chancellor at the Delaware Court of Chancery, has been making. Click for previous article

The judge would prefer long-term stakeholders to have greater say in corporate decisions. But because of the cost of such contests, index funds don't usually challenge irresponsible chief executives.

Instead, activists in for the fast buck lobby for proxy votes, get on the company board and cut capital spending. "What do I get as an index investor?" asked Judge Strine, at the NYC Bar event.

The bad news is that index investors are sitting ducks for both bad corporate executives and quick-fix activists. The good news is that mutual funds may now be more open to engaging in activism that provides value for long-term investors.

Chidem Kurdas maintains the blog MutualFundSmarts.com, an informative outlet for sophisticated mutual fund investors; and the blog Manhattan Capital (www.JenniferKerfuffle.com), a hilarious, libertarian news-spoof. Chidem is also a contributor to ThinkMarkets.