The global downturn forced hedge fund managers to respond swiftly and radically to the demands of investors, according to a new survey published by Ernst & Young.

The survey, Weathering The Storm, was conducted by international research-based consulting firm Greenwich Associates for Ernst & Young and polled 100 of the world's largest hedge funds. It highlights the significant changes to the governance, fund administration and investor reporting in funds over the last year, all of which have enhanced investor confidence without significant additional cost to the fund.

Respondents believe that increases in transparency and governance brought on by the crisis represent dramatic improvements for investors. They see this rapid transformation as proof that the industry can effectively respond to the needs of investors. This is in stark contrast to managers' opinions about increased regulatory oversight, which they view as imprecise, of less utility to investors and overly expensive.

The financial crisis has forced dramatic changes to the hedge fund industry with the managers interviewed changing liquidity terms (40 per cent), investor reporting (38 per cent), fund administration or custody (32 per cent), fee structures (27 per cent), and risk management (27 per cent) since the beginning of the year.

Over half of the funds (56 per cent) surveyed had made or planned to make changes to redemptions terms and/or fees. One in four have lowered fees because of investor pressure with nearly half having done such to entice new capital. More controversially, almost a third of managers opted to impose gates or suspensions on redemptions during the crisis but they remain optimistic that their actions will not have a negative impact on their ability to maintain or raise capital. Some 53 per cent believed it would help maintain current investor capital in the fund over the long term.

Approximately 80 per cent of managers responded that the primary area of focus for increased disclosure has been a better understanding of risk and performance. It is noteworthy that by a three to one margin investors are more focused on a better understanding of risk than performance. The most significant increases in risk management information shared related to risk concentration (95 per cent) and leverage (71 per cent).

Outside Europe, and particularly in the US, there is limited awareness of the draft European Commission Directive on Alternative Investment Fund Managers. Approximately a sixth of respondents who had considered the directive said they would cease operating in the EU altogether if it was passed in its current form, with 30 per cent saying they won't set up an office there.

Over four-fifths of European funds believed that the directive would increase costs, while 28 per cent believed it would improve investor confidence; 26 per cent thought it would slow down reporting.