Funds which charge investors to pick out successful hedge fund bets are struggling to reinvent themselves and convince their clients they are worth the fees.

The $895 billion hedge fund of funds industry has seen assets contract sharply in the years since the financial crisis, with the number of firms down 30 percent in part because of weak returns that have generally lagged straight hedge funds.

The downturn in the fund of hedge funds industry started in the 2008, at the height of the crisis, with outflows of $40.9 billion, increasing to $118.4 billion the year after, Hedge Fund Research data showed. They slowed to $4.1 billion in 2014, only to rise again in the first half of this year to $5.2 billion.

Since then, the high-profile collapse of London-based Liongate Capital, which shut this quarter citing an exodus of clients, has put the sector in the spotlight.

A desire on the part of pension funds and others to invest directly in a manager, thereby avoiding the extra layer of fees, has forced fund of funds to expand the services they offer or merge to boost assets and get economies of scale.

"Hedge funds have changed, our clients have evolved and they have become more demanding," Ronan Cosgrave, managing director at U.S. firm PAAMCO, which manages $9 billion.

"Any fund of funds which is successful in 10 years will be those which have anticipated and changed with the market. You've got to be doing something the client thinks is valuable to get paid for it."

Funds of hedge funds traditionally charged an annual management fee of up to 1 percent of an investor's assets and a performance fee of up to 10 percent to pick individual hedge funds. Those charges were layered on top of the individual hedge funds' 2 percent management fee and 20 percent performance fee.

Many cost-conscious investors have walked away rather than stump up the cash, more confident in their abilities to pick a winning manager as new rules encouraged the hedge fund industry to become more transparent.

A number of pension funds, in particular, have also developed expertise to select funds in-house and so no longer require the expensive middleman.