The hedge fund industry is emergingfrom the ashes of 2008, and will inevitably grab a larger share of theinvesting public’s assets. Low interest rates and hero status made itway too easy for inexperienced, untested, and sometimes unscrupulousmanagers to raise new funds that charged management fees as high as 3%with a 50% performance bonus. Behind every “liar loan” was a bondmanager happy to soak it up through securitized Fannie Mae (FNM),Freddie Mac (FRE), or bank debt, shorting Treasuries against them, andthen leveraging the 40 basis point spread by 50 times to generate ahighly marketable 20% gross return. Never minds the risks. It was easymoney, as long as there were lots of liars, which mortgage brokersherded in by droves, and as long as spreads narrowed, which they didfor most of the 21st century. By the beginning of 2008, assets undermanagement soared to $2 trillion. The melt down that followed wiped outlarge numbers of funds, and raised gates for the survivors, makinginvestors wonder if they would ever get their money back. Total assetsplunged to $1 trillion in the blink of an eye through a combination ofredemptions and market losses. The new era that is emerging will bepopulated with humbled and chastened managers offering more disclosure,lower fees, no gates, and thanks to Madoff, oodles of third partyoversight. Their portfolios will have less leverage, be invested inmore liquid securities, and bring in lower returns. But the newgeneration will also offer investors battle tested strategies thatsurvived the 100 year flood. Bridgewater, with $37 billion in assets,is now the largest hedge fund, followed by JP Morgan with $36 billion,Paulson & Co. at $27 billion, DE Shaw showing $26 billion, andSoros still at a hefty $24 billion. Long track records and a Guccicachet will assure that these will prosper. Fees settling down to the1%/20% range. For the rest of us this means more capital bunching up inthe most successful trades, as we have already seen this year infinancials, China, oil, and copper. It is also going to be much harderto get new funds off the ground.