Hedge funds are enjoying a spectacular renaissance that has helped close the painful chapters covering the Asian financial crisis and the collapse of Long-Term Capital Management in 1998. Having 'done the crime', in the judgment of many Asian investors and regulators left to pick up the pieces after their run on the Thai baht in 1997, they have now done the time. All is forgiven and forgotten. Or so it would appear. From a total of 1,950 funds with US$60 billion of assets under management globally in 1990, the industry has enjoyed an explosive growth rate that took the number of funds to 8,000, and assets under management to US$775 billion by the end of last year. By May this year, assets under management broke through the US$1 trillion barrier, according to Alternative Fund Services Review, cited in a CSFB report on the industry. In an exodus similar to that during the dot.com boom, investment bankers have been quitting their jobs to climb on to the hedge-fund bandwagon. Reasons are not hard to find. Until recently, conventional 'buy-and-hold' strategies have failed managers and investors relative to the more aggressive trading strategies adopted by leveraged hedge funds. Between January 1994 and June this year, CSFB noted, hedge funds delivered net returns averaging 10.8 per cent a year, versus 8.5 per cent for the MSCI World Index. Nothing succeeds quite like success, and hedge funds - with some routinely generating returns in the high teens - were on a roll. No more. In the second quarter of this year returns as tracked by the CSFB Tremont Hedge Fund Index were down 0.47 per cent. Could that be the start of a trend? JPMorgan researchers wondered about this in research published this month. Maybe all that spectacular growth has brought the industry to the point where it has become so big that hedge-fund managers have eliminated the asymmetries they seek to exploit, they mused. 'We should expect ... that the ever-increasing deployment of capital by hedge funds will eventually lead to the erosion of these high-return opportunities and should then bring the returns to hedge funds much closer to that of passively held assets.' Quite simply, with more and more funds picking up fewer and fewer pennies left in front of the oncoming steamroller, the game is becoming less and less worth the effort. Worse, the danger of some desperate penny-chasers getting too close for comfort is on the rise. In Hong Kong, the Securities and Futures Commission has chosen this point to launch a review of hedge-fund regulations that it hopes will encourage more managers to locate themselves here and sell more of their products to retail investors. The motivation is sound enough - to provide investors with greater choice, particularly at a time when interest rates are so low and equity markets so uncertain. All of this would be unexceptional, were it not for those nagging doubts about future returns to hedge funds and their pursuit of profit at any price. In this regard, the International Monetary Fund warned this week that tumbling returns might tempt some hedge-fund managers to play double or quits. It also called for more, not fewer controls over the industry, particularly given the shadowy role that some hedge funds might have played in the recent surge in oil prices.