The hedge fund industry is no doubt bracing for change. Those that survive will face a new era, one in which the balance of power will reside with the institutions. You can no longer take your limited partners for granted. There will likely be some changes to the traditional--and I do mean traditional--2x20 fee structure.

Some might think that more funds will discount to attract investors, which has been going on for a while now. The fact is that there will likely be some more profound modifications. There are two big issues here. The first deals with the incentive fee. Many are of the opinion that hedge funds perhaps should not be charging fees for beta, only for alpha. And this is a good point. An incentive fee of say 20 percent or even 10 percent sounds high for market performance. Only now the institutions maybe in position to demand some changes.

It remains to be seen how funds could technically account for this issue, but we may see some simply back out a relevant index, the S&P 500 at a minimum, from performance figures.

The other issue has to do with time frames. Paying fund managers over the short-term (quarterly or annually) may not be a good idea, especially if the fund is dealing with illiquid or highly volatile securities. Some funds really ought to use a longer payout period that dovetails better with their investment time horizon. On top of that, you easily end up with some incentive fee volatility, as incentive fees apply to paper gains as well as actual gains. In some cases, some tricky mark-to-market issues come into play.

One idea, noted by the Financial Times, is to adopt a more private equity-like approach to incentive fees. So if fund has a multi-year time horizon, they should not take incentive fees until the end of that period. They would still presumably receive a management fee.

Aligning the payout structure with the time horizon might have benefits for funds as well. A longer lock up would allow them to more easily ride out the downturns--avoiding a crush of redemptions requests.

Looming over all of this: The still-budding idea of passive hedge funds. The low costs structure may appeal to more who don't want to have to deal with the idiosyncrasies of specific funds. If you can find an index that gives you what you want, why not? - Jim