Hedge fund fees should not exceed 40 per cent of the level of outperformance the managers are able to generate, according to new research by Towers Watson.

The professional services firm said hedge fund fees were still too high, resulting from capacity constraints in the past.

Although the global financial crisis (GFC) has led to scrutiny of the traditional hedge fund fee structure, where managers charge a 2 per cent management fee plus a 20 per cent performance fee, fees still do not reflect a proper alignment of interests.

"We believe skilled managers should be rewarded and we do not believe that cheaper is better," Towers Watson senior investment consultant Ross Barry said.

"However, hedge fund terms should be structured to allow for a more reasonable alpha split between the manager and end investor than has previously been the case."

The Towers Watson research, released today, argued investors should spend time on assessing how much of a fund's return came from investment skill and how much came from market movements.

"The separation of alpha and beta is complex, but in our view worth analysing in detail," the report said.

"We have a target level of about 30-40 per cent of this alpha being paid to the manager."

Barry said that although the GFC led to a higher scrutiny of fee structures, consolidation in the hedge fund industry had still enabled the surviving managers to charge hefty prices.

"Generally speaking, hedge funds is one area where there hasn't been a lot of concessions from managers on fees and for most part Australian superannuation funds are still largely price takers in this market," he said.

"It reflects a number of things, but there has been some consolidation in the hedge fund industry, such that some of the better managers have been able to attract new flows without having to discount their fees.

"There has also been a very strong flow from fund of funds and all groups are all looking to invest more directly into funds."

Towers Watson suggested proper fee structures would also include appropriate hurdle rates, non-resetting high-water marks, extension of the performance fee calculation period, clawback provisions and reasonable pass-through expenses.