Credit Suisse's prime services group has conducted a survey that illustrates the extent to which the relationship between hedge-fund managers and their investors has changed. 

Overall, the relationship is on a more sustainable footing, says Benjamin Happ, Asia-Pacific head of capital services in the prime services group in Hong Kong. "The word we would use is 'appropriate'," he adds, when defining the circumstances in which either investors or managers adapt to the new environment.

"There has been a harmonisation of thinking about terms," says Happ. "Investors have a better understanding of hedge-fund managers' objectives and a sense of what's realistic or possible. Managers appreciate what investors need."

There is evidence that, where this 'meeting of the minds' fails to take place, assets are being withdrawn. The survey of managers, which combined run $475 billion of assets, finds 65% enjoyed net asset growth in 2009. Which means 35% saw AUM decline last year.

(The news was better for Asia-based managers, which comprise 18% of the number of respondents in the survey. Of these, 73% reported net AUM growth in 2009.)

Net inflows were not homogenous, but largely went to firms that enjoyed good performance in both 2008 and 2009. Meanwhile there was little tolerance for managers that missed the upside of 2009.

This divergence is especially true when it comes to sourcing capital from investors in the Asia-Pacific region. Overall, these comprise a small part of hedge-fund capital, with an average of 4% from Japan and 7% from Asia ex-Japan (including Australia). The vast majority of flows to hedge funds, including those with Asia-focused strategies, are from investors in North America and Europe.

However, Asia-sourced capital is not distributed broadly across the hedge-fund universe, but tends to be channelled towards particular managers, says Happ.

Managers say their investors are unwilling to pay for perceived beta, unless the manager is running a macro/market-timing strategy. This raises issues for Asian hedge funds. Beta has always been accepted as part of the deal, says Happ, but there is less tolerance among investors.

In Asia, multi-strategy and event-driven funds are receiving the most flows. The most capacity available resides among equity long-short funds, says Happ, and the expansion in Asian stock markets' liquidity and size suggests more assets will flow this way in 2010.

Reviewing these flows, Happ says the big theme is the way managers and investors interact. Early last year, it appeared to become an investor's paradise with regard to setting terms. The subsequent rally reversed this perception.

Happ says neither situation is applicable now. Rather, he says, the industry has moved to a more sustainable model; one in which investors and managers have a better understanding of the other's objectives and capabilities.

This is evident in terms of transparency, liquidity and due diligence. The survey finds 96% of hedge-fund managers say their investors are requesting more transparency, and at least 51% are endeavouring to meet those requests. In particular, 88% of managers have agreed to provide monthly letters highlighting portfolio risks. Similarly, 67% of managers are providing position-level transparency (with a time lag).

Other measures being requested, and in some cases met, include the provision of top portfolio holdings, full transparency within the confines of the manager's office, data provision via third-party vendors, and real-time position-level transparency.

The encouraging point is not that managers have rolled over to investor requests, but that such issues are now legitimate parts of the conversation. The extent to which managers accede to these requests will depend on the nature of the underlying strategy.

A key question concerns the hold-outs -- those managers who continue to keep information private. Are they out-of-touch dinosaurs, or the top guns whose performance numbers immunise them to such requests? "The survey deals with aggregate industry information rather than individual fund-manager data," Happ says, "but it's a fair question."

Liquidity is another area where a lot of managers (43%) say they are changing or have changed terms, often by increasing redemption frequency or reducing notice periods.

And due diligence is now taking longer, with 87% of managers saying investigations by investors go into more detail. "This is a good thing," Happ says. "It means investors have a better understanding of managers and their strategies."

This is particularly true in Asia, where investors take the longest time, on average, to conduct due diligence. Asian investors take an average 8.8 months to initiate and complete a mandate, versus the global average of 7.5 months.

Regardless of the investor, due-diligence time frames have lengthened, Credit Suisse reports. One reason is the increased focus on infrastructure, the scrutiny of hedge-fund chief operating officers and investors' general reluctance to underwrite manager's business risks.