One possible outline of the future of hedge funds is beginning to emerge from the wreckage of the industry's six-year boom, and it looks very much like the business did in the 1980s, but with lower fees.
Several of the biggest hedge funds, including the venerable Tudor Investment Corp, run by Paul Tudor Jones, are returning to their roots as traders of the most liquid currency, interest rate and equity index markets. Both have split off toxic, hard-to-sell assets into special vehicles from which investors cannot withdraw their money.
Other funds trading illiquid instruments - credit, structured products and complex derivatives - are stopping investors getting their money back, as they try to defer forced sales of assets. Many are likely to shut down as they eventually pay back disgruntled clients.
At the same time, all the strategies that relied heavily on borrowed money are dead in the water as banks cut their lending and regulators pay more attention.
It is still early to draw conclusions, but the powerful industry appears to be splitting in two. At one end are the funds that can easily sell their holdings to repay investments, following strategies such as global macro - Tudor's core - and long-short equity trading, which makes up about a third of funds.
At the other end will be funds with long lock-ups, more akin to private equity vehicles, which can justify the restrictions on withdrawals by investing in hard-to-trade assets.
Centaurus Capital, a London hedge fund that is shrinking its main fund after efforts to restrict withdrawals failed to win investor support, is planning two new funds following this model. One will be highly liquid, the other will have long lock-ups, rather than the existing fund mixing the two.
Ratan Engineer, head of the asset management practice at Ernst & Young, says investors caught out by hedge funds invoking small print to restrict withdrawals will now demand more transparency.
"People are going to say they need to understand the underlying instruments, and if they are liquid they will not accept long notice periods and gates," he says. "But if there is a good investment reason they will accept long lock-ups."
Increasing transparency is anathema to many secretive funds, which often worry about copycat investments or attacks on their positions.
But they may find it hard to resist investor demands as they try to retain investors, many of whom are quitting the industry.
Morgan Stanley estimates that from June to the end of the year the industry will shrink 35-45 per cent, with redemptions of 25-30 per cent in Europe and 15-20 per cent in the US.
Investors who want to stay are already demanding the removal of some extended notice periods for withdrawals, which they regard as unjustified, and lower fees in return for their loyalty.
"The shoe's on the other foot now," says one prominent investor in hedge funds. "Up to now the hedge funds have held the power so they have been able to impose these ridiculous fee terms and lock-ups. We are putting on our size 12s and kicking our managers, telling them change these terms or we are going to pull our money."
The heads of five funds running more than $15bn, and numerous smaller funds contacted by the Financial Times all said they expected fees to drop - although some thought they would get money locked up for longer in return.
"Hedge funds will want longer-duration capital," says the founder of one of the US's largest funds. "You are going to have to incentivise investors through lower fees."
Another warns that competition is likely to increase, prompting fee cuts, as funds struggle to survive. Many funds are well below previous highs, known as high-water marks, meaning they face no prospect of earning performance fees this year or next.
"People who are down 20 per cent are so far below their high-water marks that they have to get in new money just to pay the bills," says the founder of one of London's largest funds. "So they are offering lower fees."
This is already visible in the fund of hedge fund business, where some recent mandates have been awarded at less than half the fees usually charged, according to managers.
Other managers and investors are discussing whether funds should charge fees only on realised profits, the standard practice in private equity, not paper profits.
Some new funds also have been offering surprisingly low fees, investors say. For example, a new fund from London-based Ferox, designed to capitalise on the crisis in convertible bonds by taking directional positions, has a fixed two-year life and fees of either1 per cent a year and 10 per cent of profits or just 15 per cent of profits on returns above an annual 10 per cent.
"A lot of the corruption of the [hedge fund] proposition is being laid bare and will be eradicated," Mr Engineer says.
The change to a new model is happening fastest at funds that have hit problems or been faced by very large withdrawals.
Mike Novogratz and Adam Levinson, managers of Fortress's Drawbridge fund, for example, told investors last week they planned to "offer an opportunity for reduced fees" on the fund, as well as focusing on highly liquid trading strategies.
The $7.2bn Drawbridge faces $3.51bn of redemptions, which it has suspended, after falling almost 23 per cent in the year to the end of November.