Hedge Funds' World of Hurt

Indeed, a marginal trading strategy that generates 5% returns can be ratcheted up to 30% applying six times leverage -- but, on the flip side, the risk of steep losses rises, too. This is what many investors faced in Bear Stearns' highly leveraged (and now bankrupt) hedge funds, which used leverage of more than 10 times in some cases.

Such was the case with Goldman Sachs' so-called quantitative Global Equity Opportunities Fund, which saw about $1.4 billion of its value wiped out, according to Bloomberg. Goldman since has injected $3 billion to prop up the failing fund, alongside billionaire investor Eli Broad and former AIG (AIG Quote) Chairman Maurice "Hank" Greenberg, among others.

Although Goldman has repeatedly rejected references to the cash injection as a bailout, the white shoe investment firm has taken the added step of cutting the 2% management fee as well as any performance fees that might be associated with running the vehicle.

Goldman's fee-cutting maneuver likely is one that will be mimicked by other hedge funds trying to retain investors and draw in new cash.

"You're moving into an environment where you have to try and retain capital to ensure confidence," says Steven Weddle, director of alternative investments at ING Investment Management, whose firm was not invested in Goldman's Global Equity vehicle.