Yahoo! co-founder Jerry Yang has announced that he is stepping down as chief executive after 16 months at the helm of the online giant. In a memo to staff, Yang said he would leave the top job and return to being 'Chief Yahoo!' - the position he had before replacing former CEO Terry Semel in mid-2007 - as soon as the board of directors finds a replacement.

The way is open for hedge funds to play a key role in Yahoo!'s future, whatever it may be. Activist investor Carl Icahn and Paulson & Co, the New York-based hedge fund manager that made a fortune by successfully calling the sub-prime collapse, took up stakes in the company when Microsoft was trying to acquire it earlier this year.

Executive search firm Heidrick & Struggles has been retained to lead the search for a new chief executive. One possible candidate is former Yahoo! chief operating officer, Dan Rosensweig (photo), an operating principal focusing on media business at alternative fund manager, Quadrangle Group, which is shutting its media hedge fund, Quadrangle Equity Investors, following weak performance and large-scale investor redemptions.

The change of management is likely to please Icahn and John Paulson, who challenged the board over their handling of the Microsoft bid. The software giant bid USD33 a share for Yahoo!, compared with a current share price of little more than USD10.

Yang's decision to step down follows what critics say was his mismanagement of the Microsoft bid and the failure of an alternative deal to co-operate on internet search with Google, which dropped the plan lat month when it ran into antitrust problems. With Yahoo!'s share price languishing, other hedge funds may be tempted to step into the fray. Whether it will enable Yahoo! to make a comeback in the internet services market is another matter, of course.