Hedge Funds became very popular in the naughties, growing to about $2trillion in late 2007.  Funds were awash with cash and too many funds were chasing the same anomalies.  Anything that appeared to be a good idea was quickly swamped and the price pushed up or pushed down beyond anything that could reasonably be justified fundamentally.  For example, the rush into oil caused petrol prices to increase dramatically, curtailing demand for gas guzzling cars which has had a major detrimental effect on the car industry in America. This change in demand may have occurred naturally but it would have taken more time and given the car industry time to adjust.  Similarly, the vast, rapid short selling of Fannie and Freddie and other banks has destabilised the financial system in the USA and elsewhere.  Again these banks and institutions clearly had problems but the speed of the punishment is the issue, giving no one time to fix anything before they were worthless .  Governments will not sit idly by and watch the destruction of their economies and they have already instigated a number of changes that will impact adversely on Hedge funds.  Short selling has been banned for periods of time and this is a major tool in which a Hedge fund hopes to make money, particularly in a declining market. Credit default swaps ( a big factor in allowing the sub prime crisis to occur) will now have to go through a centralised clearing house.  There is no doubt that greater monitoring and transparency will make it harder to make money. 

What future does this leave for the Hedge Fund?  These funds have not delivered their promised mandate of positive returns.  Some have performed very badly, particularly those invested in convertibles as spreads blew out and stocks became illiquid. There have been significant redemptions of Hedge funds, putting further downward pressure on markets as the Hedge funds are forced to sell anything they can.  Governments will continue to introduce restrictive measures aimed at curtailing any potential damage Hedge funds can inflict on the markets and the economy in future.  Investors are increasingly shying away from risk further reducing the appeal of Hedge funds.  In conclusion, although Hedge Funds may not be actually outlawed, going forward the outlook for their viability is very poor and only a few will survive.