How Hedge Funds Will Survive

So what will the regulated hedge-fund future look like? Perhaps the biggest change will be a reduction in risk. Even assuming the big banks bounce back, they are unlikely to provide hedge funds with the money to take risks like they did in the past.

During the boom, borrowed money allowed some hedge funds to boost their leverage as high as 20- or 30-to-1. That means for every $1 of capital in a fund, it held assets worth $20 to $30. Those numbers have come dramatically down—Britain's Financial Services Authority estimates that average hedge-fund leverage fell to 1.15-to-1 in October from about 2-to-1 a year earlier—and will not return to those dizzying heights anytime soon.

Instead, hedge funds, which emerged in the middle of the 20th century, are likely to move back toward their original aim of hedging risk rather than taking it.