With so many investors burned by the across-the-board dismal performance of 2008 and continued volatility into 2009, more are likely to conduct due diligence on hedge funds and exercise greater market discipline, said speakers at a recent conference hosted by Cayman Islands law firm Walkers.

“In today’s environment, there can no longer simply be a checklist to confirm a process. Potential investors must look at what motivates and drives the relevant providers,” said Ingrid Pierce, a partner with Walkers and head of the firm’s Cayman Islands hedge fund practice.

“Custody diligence is very much at the forefront of people’s minds,” she continued. “Key questions include whether counterparties have the ability to move or re-hypothecate assets and whether contracts will hold up in an insolvency. All participants, including legal counsel, have to increase our awareness of the issues and address key areas of risk with our clients.”

Todd Groome, non-executive chairman of the Alternative Investment Management Association, added: “Market discipline from investors is back with a vengeance. Investors are asking for greater transparency to create a more idiosyncratic contract for their particular situation, and a particular strategy.”