HANOVER, NH (ETFguide.com) - Passive funds are outselling actively managed mutual funds. They're winning because the fund industry gave up marketing actively managed funds soon after the dot-com crash of 2000. 

Another contributing factor is the innovation happening within the passive space.

Over the past 5 years, ETFs have expanded their reach beyond traditional asset classes like stocks and bonds. Currencies (NYSEArca: FXE), commodities (NYSEArca: DBC), gold bullion (NYSEArca: GLD), and international real estate (NYSEArca: RWX) are just a few examples of asset categories with little or no mutual fund choices.

Still, active management isn't dead.  But ironically, the most famous active manager doesn't  run a mutual fund. His name is James Cramer.  If he ran a mutual fund you can bet it would sell (performance is another matter).  Love him or hate him, he makes the stock market engaging and inclusive.  His high-brow New York Magazine pieces are as compelling as his Joe-The-Plumber rants. Unlike yesterday's manager, he avoids jargon-filled post-mortems on the market.  He says "This way to The Fountain of Youth", not "This way to 14.7% returns with a Sharpe ratio of 1.32".  

How can mutual funds generate excitement?  The first is to re-vitalize their half-hearted performance fees, those that have them.  Almost 300 mutual funds have performance fees?  Here's a list of 100 performance fee funds. The assets of these funds were recently close to a trillion dollars.  Around 70 Fidelity Funds have them; 27 Vanguard Funds, 9 Janus Funds, 5 Pioneer Funds, Bridgeway Funds and many one-offs.

The resurrection of actively managed funds will come from those, who like Calvin Klein, will only find success when they start selling the lifestyle of the person in the jeans (funds), not the jeans themselves.

Performance fees can be fun.

Bridgeway Funds, for example, has performance fees, but their message is very 1990s, "Bridgeway is a quantitative investment management firm that employs a wide array of proprietary statistical models to assemble investment portfolios that are designed to outperform their targeted benchmarks."

What do potential investors read?  "You can't possibly understand our secret proprietary formula so just give us your money."  Then they'll do a little research and discover ninety-one percent of Bridgeway funds have 3 stars or less.  Confused, they'll play it safe and dial 1-800-VANGUARD.  That's unfortunate, Bridgeway is an early adopter of performance fees.

Bridgeway's oldest funds are the Bridgeway Aggressive Investors 1 (Nasdaq: BRAGX) and Bridgeway Ultra-Small Company (Nasdaq: BRUSX).  Both handily beat the large Vanguard index funds.  Though you shouldn't compare those funds to large growth index funds, people do.  The average investor doesn't care about objectives, categories, risk-adjusted returns and other inside-advisor-baseball.  They want to invest in someone they believe in. John Montgomery is one of those people. 

At the end of 2007, Bridgeway had about $3.4 billion in assets.  Last month they were down to $1.3.  Bridgeway may be confusing the investor's journey with the destination.  It's a given that every fund seeks to beat the market with its proprietary whatever.  And no one would admit to investing in a fund to lose money.  The trick is in selling performance fees not as an implied promise of future riches, but as a shared goal.     

Here are 10 fund managers and their largest funds with performance fees: Fidelity Contrafund (Nasdaq: FCNTX); Vanguard Wellington (Nasdaq: VWELX); Janus Contrarian (Nasdaq: JSVAX); RiverSource Diversified Equity Income (Nasdaq: INDZX); Pioneer Fund (Nasdaq: PIODX); USAA Tax Exempt Intermediate-Term (Nasdaq: USATX); TIFF Multi-Asset Fund (Mutual Fund For Charities); Calvert Large Cap Growth (Nasdaq: CLGAX); Legg Mason Partners Investors Value (Nasdaq: SAIFX) and Royce Value (Nasdaq: RVFCX).

If actively managed mutual fund managers reach out to investors with their ideas (skipping the "this percent, that percent" regurgitation of market numbers) and promote their performance fees, they still won't turn the tide against index funds.  But they can attract money that simply believes active is better than passive.  Mad Money is loud and obnoxious, but when I see a Cramer piece in New York Magazine I carry it back to my study where I can savor every turn-of-phrase. 

For actively managed funds to work, managers need to generate that kind of connection to their shareholder.  With stock commissions under $10 and ETFs competing for every investor's dollar, fund managers can't compete for new shareholders on tired shtick. 

Broadway was once dying and Rosie O'Donnell helped them bring in movie stars.  Some might argue that Hollywood killed the theater.  I bet the people who work there and those who buy tickets have a different perspective.  For actively managed funds to survive, they need to go Hollywood.

Max Rottersman is a founder of FundAnalyze. His opinions don’t necessarily represent the views of ETFguide.com or Yahoo Finance.