* Industry meets in Monaco for annual bash
* Investors demand more transparency
* Industry has just had worst year ever
* Some managers saying cash is coming back
By Laurence Fletcher
LONDON, June 12 (Reuters) - Hedge funds meeting for their annual get-together in Monaco next week are hoping recovering profits will help placate clients, after the industry was heavily culled and suffered its worst year on record.
An exodus of investors followed a year in which hedge funds saw performance losses of 19 percent, a stark contrast to a decade in which people scrambled to get access to an industry that claimed it could make money in any market.
Significantly, one entire session of the June 16-18 GAIM conference in the Mediterranean resort is titled "The Rise of Investor Power".
"Survival is still the key issue for hedge fund managers," said Paul Compton, head of product management at software group Sungard's alternatives business. "It's just that they're sleeping better."
For a factbox about European hedge funds, click on.
Last year was the worst year on record for hedge funds, with the average fund losing 19 percent and a record 1,471 funds liquidating. In the months between October and March, investors pulled more than $250 billion out of funds.
Some managers say cash is now returning, or at least that outflows are slowing. Performance has also improved -- the average fund is up 9.43 percent in the five months to May, Hedge Fund Research data showed, compared with a slight decline in the FTSE 100.
"The constant trickle out from structured products and private banks has progressively been overwhelmed by inflows, principally from pension funds," said Christopher Fawcett, chief executive of Fauchier Partners.
TENSIONS
The European Commission in April published draft laws on leverage and restriction of the sale of products from off-shore financial centres.
The industry, led by the Alternative Investment Management Association, says the rules were introduced without proper consultation and hopes to influence what will be a lengthy process through the European parliament.
Investors -- concerned by the Madoff fraud -- have also become more vocal, keen to know exactly where their money is invested and wanting to do more due diligence, posing a possible conflict with managers wanting to protect trade ideas.
Clients are increasingly demanding funds have independent administrators and strong risk management systems, and invest in easier-to-value assets to help prevent frauds or to stop funds having to halt investor exits.
The financial stress has sparked talk of consolidation between hedge funds -- deals that can help smaller firms with shrinking revenues survive and that can allow larger firms to beef up their asset bases.
However, in an industry led by strong individuals, negotiating hedge fund manager egos could be tricky.
Man Group Chief Executive Peter Clarke, NewSmith Chairman Stephen Zimmerman and Eclectica founder Hugh Hendry will all be attending the conference.
REASONS FOR HOPE
Delegates will be keen to gauge the appetite of investors -- particularly institutions, who are now the main investors in hedge funds -- to put their cash back to work in hedge funds.
A survey from Barclays this month predicted $50 billion of inflows into hedge funds this year and total industry assets bottoming at $1.2 trillion mid-year and then rising to $1.3 trillion by year's end.
Last month, Clarke said he expects redemption requests from institutional investors to shift "significantly downwards from here".
Still, many investors who had expected positive returns in all markets are reeling from losses, and the average fund is still down on the start of 2008.
Further money is set to leave the industry as so-called gates -- suspensions imposed by funds -- are lifted, and investors finally get access to their cash. (Editing by Douwe Miedema and Andrew Macdonald) (To read the Reuters Hedge Fund Blog click on http://blogs.reuters.com/hedgehub; for the Global Investing Blog click on http://blogs.reuters.com/globalinvesting/)