Fees charged by hedge fund managers are lower than those charged by benchmark-aware managers, according to a review by research firm Zenith Investment Partners.

"While it is true hedge funds do charge higher fees, they are in fact not higher than those charged by benchmark-aware managers on the active portion of their portfolios," Zenith Investment Partners director David Smythe said.

There was a compelling argument that suggested hedge fund managers were charging less for alpha than benchmark-aware funds, Smythe said.

"Zenith contends that the focus on fees in the benchmark-aware space is therefore warranted. But we also note that any discussion on fees should be undertaken with reference to alpha, not just the headline fee rate," he said.

Ibbotson head of alternative investments Michael Coop said the Australian institutional investor market was the toughest in the world when negotiating fees for alternative investments.

Coop said it was important, however, for investors to consider three key factors when reviewing fees.

He said investors needed to question whether they were receiving their fair share of return and value added by the manager.

"When reviewing fees, investors also need to ask themselves how much is the strategy worth paying for, how high are returns for the risk, how consistent is the performance and is the manager effective at protecting the portfolio from large losses comparable," he said.

Another factor investors needed to consider was how much it cost to create and implement the investment strategy successfully, he said.

The Zenith review, led by the recently appointed head of alternatives Daniel Liptak, also found market-neutral funds managed to perform strongly in line with the All Ordinaries Index.

"Australian market-neutral funds have over the last five years captured all the upside of the Australian All Ordinaries, but importantly did not participate in the downside," Liptak said.

The market-neutral funds in the Zenith review delivered a cumulative return of 105 per cent, net of fees, since July 2005.

Over the same period, the All Ordinaries Equity Index returned 2.24 per cent (gross of fees) to investors.

The current review focuses on market-neutral funds and is the first of a number of Zenith reviews on the hedge fund sector.