Hedge funds have generated strong returns this year, but the $1.4 trillion industry remains in a sticky financial situation because many firms have yet to recoup losses from 2008, leaving them missing out on lucrative fees.

Hedge funds usually charge management fees of roughly 2% and collect about 20% of annual profit. However, when funds lose money they typically cannot collect performance fees until they get back to new highs — something known as a high-water mark.

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