UK - Pension funds looking to invest in hedge funds should hold off until there is greater stability and current redemptions play their way through the system, Watson Wyatt warns.
But the firm noted the "best managers" in the industry would emerge in a better position to exploit investment opportunities as a result of greater market dislocations and lower prices.
It said long term investors were likely to be the beneficiaries of this evolution - mainly through improved fee structures that better aligned interests.
And it claimed there would be certain hedge fund strategies that would struggle in future, given a fundamentally changed investment environment.
Watson Wyatt global head of manager research Craig Baker said: "In absolute terms, general hedge fund returns do not look good this year, but it is likely that they would have performed better than some other strategies - long-only equity funds for example.
"It is our belief that the current crisis will expose those that are not structured to add value for investors and will provide the most skilled with attractive opportunities and potential for substantial returns in the future."
The consultant explained there were some early signs increasing numbers of skilled hedge fund managers were becoming more flexible in the negotiation of fees - having been persuaded of the benefits of receiving long-term capital, provided by the likes of pension funds.
However, Baker noted that with a investment environment remaining uncertain for the foreseeable future, pension funds should re-think making a hedge fund investment until the markets were less volatile.
He added: "With such a rapidly changing and uncertain environment we think it is sensible that pension funds looking to invest in hedge funds should hold off until there is greater stability.
"But for those already invested we would not recommend any action, although there may be fund and manager-specific considerations that require extra vigilance."
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