Analysts estimate between 25% and 75% of all hedge funds will go out of business in the next two years and as well some should. The global investment crisis has shown not only that most hedge funds can't be depended on for absolute return and downside protection, but also that, given the right circumstances, some managers may act like a captain of a sinking ship that commandeers the first lifeboat for himself and his crew.
It may not matter anymore how investors got themselves into this sorry state. Manager greed is the accepted explanation, but that is too simplistic. Investors had no historical precedent to realize the hedge fund industry, in times of crisis, was inherently in an adversarial relationship with its own investors.
Because institutional decision-makers and consultants are not investing their own money, risk-adjusted profit-maximization is not necessarily their only consideration, e.g., career risk can dominate capital risk. There is a great incentive not to rock the boat even a sinking boat so long as other institutional investors are accepting of the same squalid treatment; and no one wants to be persona non gratis. In other words, everyone except the owners, or beneficial owners, of the money have a strong incentive to go along to get along. Even fund-of-funds managers can be more closely aligned with hedge funds than with investors because most of their money is made on the management fee, not the profit sharing.
Legal documents are expensive to review, so many investors often assume someone else did an adequate review. How many investors actually understood that the hedge fund manager could just keep their money under house arrest if, in their sole discretion, they could claim it was "necessary?" It is hard to vote with your feet if your feet are chained to the wall. Fiduciary duty has become a quaint and antiquated concept.