The hedge fund industry is recapturing assets by addressing concerns over transparency, liquidity and fraud are top of the list according to a study* published by TABB Group.

Over three-quarters (77%) said the three top concerns of investors are operations, safety of strategy and liquidity risk.

Investors are now asking more questions on topics previously seen as a minor part of the due diligence process, according to Matt Simon, TABB research analyst and author of the study. The process includes topics ranging from safety and soundness of assets to greater insight into the investment process, including actual holdings.

The focus on transparency, liquidity and flexibility are the primary drivers of the increased interest in managed accounts. TABB Group estimates assets in the industry invested through managed accounts will reach $790 billion by 2011, up from $468 billion in 2009.

Hedge fund managers said investors are still attempting to understand the differences between having a managed account versus being in a hedge fund. “The primary drawback for investors via a managed account, he says, revolves around day-to-day activity. There are cost and administrative benefits to keeping up with portfolio transactions,” commented Simon.

Within the hedge fund structure, hedge funds are trying to protect their business. TABB Group expects management and performance fees to decline over the next two years, even though they appear stagnant at present.

Many small and medium funds are driving the trend downward, as the competition to appeal to investors is intense. With a limited supply of capital at hand, hedge fund managers are in a weak position to defend against fee reductions.

Only 15% of hedge fund managers surveyed believe performance fees will decline over the next two years while 25% said management fees will decrease. Hedge funds that performed well during the past year are lowering their performance fees to make their marketing pitch more attractive.

Hedge funds said they are trying to convey confidence by implementing more liberal lock-up periods. Compared with a few years ago, the typical lock-up period has shortened. In 2006 it was approximately 13 months and today it is closer to 10, according to Simon.

The typical period of advance notice for redemptions that an investor must provide a fund manager is 30 days. Other hedge funds requiring lengthier notifications said they are re-evaluating these terms although they do not expect any changes in the near future. “They believe that the notification period is aligned with cash management best practices,” noted Simon.

“Liquid strategies that are buying and selling stocks frequently are accustomed to providing daily liquidity, but illiquid strategies must respond to the fact that investors cannot hurt the entire pool,” Simon added.

On gate provisions the report revealed such conditions exist at nearly 25% of hedge funds. In some cases these agreements are at the master fund level, while others may implement on an account-by-account basis, according to the report. “Hedge funds tell us that not having gates is now a selling point,” said Simon.

* “US Hedge Funds 2009: Fees, Redemptions and Managed Accounts” by Matt Simon, TABB research analyst. The study correlates returns from 62 US hedge funds managing with nearly $130 billion in assets under management.