Investors vexed by losses and shoddy treatment last year are not abandoning hedge funds, as feared, but are making fund managers bend.

The market meltdown of 2008 led to record redemptions and fueled worries that pricey, secretive hedge funds were a thing of the past. Yet markets bounced back in March, and hedge funds have posted their best first-half performance in a decade.

As quickly as it began, it seems, the exodus is over.

There is very much a sense of investors coming back to hedge funds, said Philippe Schenk, a director in Credit Suisse Alternative Capital. People had expected consolidation in the industry, but now they can look at the first half, the 10-year returns, and they're coming back.

It may be too soon to break out the champagne, but hedge funds are on a tear amid resurgent stocks, thawing credit markets and a lot less competition -- one in five hedge funds liquidated last year.

Hedge funds overall are up 7 percent this year, compared with 3.2 percent gains by the Standard & Poor's 500 Index, according to a Credit Suisse/Tremont Hedge Index report.

Investors yanked out $43 billion in the second quarter, Hedge Fund Research said on Tuesday, much less than the $100 billion redeemed in the first quarter and the record $150 billion withdrawn in the final months of 2008.

Recent market gains helped boost industry assets by $100 billion to $1.43 trillion and snapped a three-quarter streak of shrinking assets. All across the industry, hedge fund executives say the redemption wave is over.

There has been a shift in mood, from pure panic to where there is logic and reason and where people are making selections, said Lighthouse Investment Partners Chief Investment Officer Sean McGould, whose firm invests about $5 billion in hedge funds. The process has become more normal and you have started to see some flows into the business.

That money, though, now comes with strings.

NEW RULES

Hedge funds by definition promise to generate gains across up and down cycles, in exchange for some hefty fees. Yet the average fund lost 19 percent last year, while some star names fell by half.

Making matters worse, a number of managers frustrated cash-strapped clients by suspending redemptions. The hedge fund business lost credibility, and some investors threatened to take their money elsewhere.

Yet pension advisers said investors are not likely to quit hedge funds, which have delivered annual average returns of 9 percent since 1994. Managers, though, are expected to change their ways and be more responsive to shareholders.

All institutional investors were disappointed with the performance of hedge funds in 2008. They did not get what they thought they were going to get, said Allan Emkin, a veteran pension adviser and founder of Pension Consulting Alliance. Investors are questioning the fee structure and governance of hedge funds.

Pensions in California and other states have been pushing fund managers to radically change their ways. They seek performance fees that are aligned with long-term results, more information about their portfolios, and increased access to their money. In short, investors are rethinking their approach to hedge funds and how much exposure they can handle.

The reticent funds are trying to find their comfort levels, Marc Friedberg, a Pittsburgh-based pension and endowment adviser at Wilshire Associates. Those who have hedge fund investments are keeping them, but they've changed the level of detail they want.

Illustrating this change is Brian Singer, a veteran investor who once managed $200 billion at UBS and who recently launched Singer Associates LLC. His new funds promise transparency, no lockups and a five-year deferral period before he can earn performance fees.

Still, even as performance recovers, investors are still skeptical. Hardened by their experiences last year, pensions, endowments and even wealthy individuals are expected to demand more service in exchange for their business.

There's been a move from a buyers' market to a sellers' market, said Keith Black of pension advisory firm Ennis Knupp + Associates. As a result, hedge fund managers are more open to new investors, separate accounts, more transparency and alternative fee structures.

Credit Suisse Investment