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.

Without performance fees, firms can struggle to pay sufficiently large bonuses to keep top traders and analysts on board. That is particularly true when rival firms are above their high-water marks and are collecting performance fees that they can use to poach talent.

In April less than 13% of the largest 1,100 hedge funds tracked by BarclayHedge reached a new high-water mark, while more than 18% of funds were still more than 30% off their prior peaks, according to an analysis by the research firm TrimTabs.

On average, the industry was 17% below its high-water marks at the end of April, TrimTabs said. It could take about three years to make up these losses, the firm said.

Since April, many hedge funds have continued to generate strong returns, putting the industry on course for its best year since 2003.

The average manager is still up less than 13%, after losing a record 19% in 2008, according to Hedge Fund Research, a Chicago firm that tracks industry performance.

More than 70% of hedge funds still have not recovered from 2008 losses, according to Hedgefund.net, another tracking firm.

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