MONACO, June 18 (Reuters) - Hedge funds are going to have to dance to their investors' tune once more as lucrative profits fall and a new breed of clients begins flexing its muscles, demanding more results from managers.

Institutional clients, a growing part of the hedge fund investor base, are questioning high fee levels and say they want to see what managers are really doing with their money - an understandable worry since the Madoff fraud.

They also want to know how hedge funds manage risk in choppy markets after record performance losses last year, and are balking at funds that are restricting investors from accessing their money by using so-called gates.

"Investors always should have had the power," Hugh Hendry, partner at hedge fund firm Eclectica, told Reuters at the GAIM conference, an annual hedge funds industry gathering.

"The willingness to accept gates and high...fees represents greed and that culture of greed has been popped."

Investors, led by wealthy clients, pulled out $250 billion between October and March while funds delivered a negative 19 percent performance last year, shrinking the industry to around $1.3 trillion and eating into managers' huge profits.

Traditionally conservative institutional investors such as pension funds now hold more than 50 percent of hedge fund assets, possibly because the wealthy individual clients who stood at the cradle of the industry are pulling out their money.

This leaves hedge funds with the tricky balancing act of trying to maintain a reputation for daring market bets and big returns while raising risk and administrative procedures at a time when revenues are down.

"Hedge funds have got to position themselves to take institutional money," said Simon Luhr of investment firm SW1 Capital. "The trick is keeping flair and the partnership ethos that exists in hedge funds."

Gone as well are the days of easy money, with widespread criticism of the lucrative two percent management and 20 percent-plus performance fees that were not under pressure as long as the funds performed in the bull market.

"You really have to do the maths...sometimes it's absolutely astounding, the level of fees, particularly the layering of fees," said Andre du Plessis, corporate director at Hermes Fund Managers, which runs around £30 billion ($49.19 billion) in assets.

"If the private investors who pay these fees were to sit back and look at what percentage they're paying of potential alpha, they'd probably be stunned," he said.

Also many investors found they could not get to their money when they needed it the most, as hedge funds had put up gates, side pockets or suspensions to limit investor access - and few are likely to let that happen again.

"It's their money, it's not your money," said Randall Dillard, co-founder of Liongate Capital Management.

"Perhaps the most disturbing element I've found is single managers saying 'I don't want to be a cash machine', forgetting whose cash it is."

But some say the lack of trust can now run very deep in the wake of Bernard Madoff's $60 billion Ponzi scheme.

"With new managers, it's horrible to say this, but it's got to the stage now where you want to check the office exists," said Jonathan Feeney of Investcorp Investment Advisers. "It's the paranoia now, post-Madoff."