Antonio Borges, chairman of the Hedge Fund Standards Board, told the news service that it was "worrisome" that more and more hedge funds were giving some clients so-called "side letters".

Side letters are separately negotiated agreements. Under their terms, an investor can obtain preferential access to cash or rebates on fees. Firms can also say if they may waive notice periods on redemptions, the report said.

The issue is particularly sensitive as the hedge fund industry, while it enjoyed robust returns in 2009 after record poor performance in 2008, is still seeking to rebuild client confidence. One issue that surfaced during the financial turmoil was clients' ability to exit funds, as a number of funds shut the exits on redemptions or imposed gates and other restrictions on client pullouts.

As a result, a number of investment firms are rolling out products such as managed accounts and “hedge fund lite” absolute return products wrapped inside UCITS III structures. UCITS III funds, which are sold in the European Union across national borders, permit fund managers to engage in some of the financial techniques employed by hedge funds and also typically provide relatively high standards of disclosure and liquidity. However, some people in the industry have warned that UCITS funds are not a panacea and can carry their own specific risks.

Talking about the use of side pockets, Borges was quoted saying: "It's happening more than before. It's worrisome... The worries are that some investors get better terms at the expense of others if there are side letters."

Borges said some investors legitimately require different terms, but said others investing money into the industry as it recovers from the credit crisis are negotiating more favourable terms than other clients, who may not be aware of this.