Absolute return strategies do not always produce absolute returns, and alternative investments are not always decorrelated from the mainstream. Long/short investors do not always have skill in shorting, let alone the long.

Convertible arbitrageurs are not always able to arbitrage their convertibles. Leveraged strategies have seen their leverage dry up and the computer models of quantitative managers appear to have broken.

Or as one observer put it recently: “Minus 5% is the new zero in the hedge fund world”.

The practitioners of that disparate group of investment strategies known as hedge funds have had some success in recent years in attracting pension fund trustee boards to entrust their assets for high fees, usually a 1% management charge and a 20% outperformance fee, although ‘2-and-20’ is also common. Now many investors have had it brought home to them that the marketing brochure promises have not worked out in reality. After a year of appalling index returns, the alleged Madoff fraud has hardly helped maintain confidence.

A sample of net-of-fee returns reported to us by our readers for our monthly Off The Record survey brings the point home. Almost three-quarters of our sample reported that their 2008 hedge fund returns would be lower than -5% and 86% said they would be less than zero. None reported returns of greater than 5% for the year.

Our survey also indicates mistrust towards hedge funds for two main reasons. In some cases there was a lack of confidence in the hedge funds themselves. But there was also often mistrust of pension funds’ own abilities to conduct the necessary due diligence to assess the asset class.

It might be worth sharing one or two of the other common factors uniting the respondents to our survey. First, those looking to sell hedge fund holdings are most likely to do so because their strategic weightings have fallen out of kilter. In other words, their equity holdings lost so much money that their hedge fund holdings are above their strategic benchmark.

Second, those investing in hedge funds have not had a positive 2008. But some degree of decorrelation has been evident and hedge funds have served to dampen overall losses, especially for those funds with a large equity weighting.

Third, the alleged Madoff fraud may be breathtaking in its scale. But in looking at the answers of the 70-plus respondents to our survey it does not appear to be a decisive factor in swaying general opinion for or against hedge funds.

Few of those who were invested in hedge funds have had their faith shaken just because of Madoff; those who did not like hedge funds prior to Madoff continue to dislike them and will probably not invest. But it is otherwise likely to be harder to convince trustees to invest if they were already cagey.

The weather vain of public opinion is also not blowing in the direction of hedge funds, so the 60% of respondents who do not invest in hedge funds might have a further reason to be cagey. Politicians and others in favour of greater regulation of hedge funds are calling for greater oversight and control. These uncertainties are likely to affect institutional investors’ hedge fund decisions for some time to come.