Usually the deal was, give us X dollars, and you can engage in late trading (eg, jumping in and out of the fund at stale prices, usually only a few hours old. 40 well-timed shifts often meant 20% annual returns for virtually no risk). The fund managers get paid based on the management fee, which is a percent of assets under management, and so giving up some return to get more money was a good, though short-sighted, trade for them. I can't believe those at the top of the funds, their superiors, would allow this to happen except if they were incompetent (didn't know what was happening) or malicious (enjoyed making a few million extra by taking money from the average investor). The outsiders, including hedge funds, are less culpable, not just because I drink beer with these people, but because usually they didn't break any laws (I still think it's a slimey trade, and did nott made a dime off it).

I think people got away with it for so long because it was mainly on international funds, and it's harder to benchmark those funds since they are complex combinatons of countries, styles, and industries, making underperformance harder to spot.