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The Opalesque Team: It is possible that the negative connotations of leverage may shape future investor allocations even more so than poor performance across the industry or the fraudulent behavior of a few. In a white paper released by investment consulting firm Mercer, clients still wishing to allocate to hedge funds are recommended to seek out asset classes which have not been affected by de-leveraging. The strategies include equity long/short, market neutral, liquid trading strategies such as global macro, and specialist strategies requiring only modest leverage such as distressed debt.

“Leverage has been the dirty word all year long, and many investors have been seriously damaged or destroyed by its weight.” Said Mark Fucci of law firm Bingman McCutchen in Debtwire’s recently released North American Distressed Debt Outlook for 2009. “The increase in the non-leverage players results as much from industry fallout as from a voluntary decision to reduce debt.”

Expecting hedge funds to have to “fight” for allocations, Mercer also alludes to the possibility that industry fee structures may decline in the near future. While the standard remains 2% and 20%, institutional investor The Utah Retirement Systems have reportedly reached out to other large institutional investors with a proposal to demand hedge fund fees be reduced to cover operating expenses only with performance fees to be paid at the end of lockup periods or on deferred schedules.......................

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