Fund managers did very well during the recent boom. Thanks to favourable factors, in most cases not of their own making, they boosted their personal fortunes beyond their wildest dreams.

But now a new and harsher environment is taking hold. Those fund managers whose pay packets and egos had become inflated on the easy gains of ever-rising markets are going to have to work a lot harder to justify their fees.

Some of those who struck out on their own in the boom years to start their own investment firms are going to find out just how small the margin between success and failure has become. Some are going to go out of business.

Investors who put their money with small fund managers have been taking on business risk - the risk the business may fail - probably without ever realising it.

Some boutiques have failed because their investment portfolios have blown up. They were investing in exotic derivatives and financial instruments that only a rocket scientist could understand. But other boutique share funds that fail will do so, not only because of the sharemarket downturn, but because their business lacks the scale and resources to withstand such a downturn.

Most investor's money will be safe if it is invested in highly liquid assets, such as shares. But in order to have an orderly wind-up of the fund, redemptions will be frozen until such time as the investment portfolio can be sold down and investors' money returned to them. The winding-up process could take many months with investors forced to realise capital losses even if they had wished to stay in the market.

The "good" times of debt-fuelled over-consumption had to end but when the boom was on virtually anyone who set up shop on their own was guaranteed to attract investors. Funds management talent was always spread thinly and this becomes blindingly obvious during an extended downturn.

Fund managers promise they will generate returns above the market index, after fees. And they promise to do so with an acceptable level of risk. But most managers will find it hard to justify their fees during a downturn.

It is hard for most fund managers to add value for investors even in normal times. The point was underlined recently by London-based consultancy Inalytics. The researcher showed that share fund managers only get half of their investment decisions right. And the really good managers? Well, they get 51 per cent of their decisions right.

Inalytics, which researches fund managers for superannuation funds, found that these good managers do better than that for investors because they make more money from the correct calls than they lose from their poor decisions. Inalytics analysed 215 share portfolios with a combined value of $US152 billion (about $235.3 billion) and found that fund managers' skills are measured by their ability to pick the winners rather than their ability to avoid the losers.

The longer the bear market goes on, the bigger the shake-out among fund managers will be. Those boutique managers, who opened for business several years ago, will survive the lean times. They were the first generation of boutique managers and the individuals that started them are the most talented.

During the tail-end of the boom there was a rush by the less talented to set up shop. Those that do not have adequate capital backing and a loyal set of investors will have no choice but to close their doors.

The big boutiques such as Platinum Asset Management, Maple-Brown Abbott and Investors Mutual will easily see out the downturn but expect the casualties to be among the newer boutiques.

Now, more than ever, investors have to consider a fund manager's business risk before deciding whether to invest with the manager or not.