pull out, reports Ahmed ElAmin . But there is a belief the downturn will eventually lead to a stronger industry.

The outlooks of hedge fund managers, the bankers who finance them, and the investors who put their money into their care has changed dramatically in the last three months.

Earlier this year fund managers were pleasantly worrying about how to handle all the money investors were sending their way. Now they're worrying about a panic pullout.

The normal mix of fear and greed has turned to pure terror, according to a panelist at one of the world's largest hedge fund conferences, which opened yesterday at the Southampton Princess Hotel.

Others called for reform in the way hedge funds are being run, and the types of investors they cater to, so as to protect the long term growth of the industry.

About 900 participants are mulling over the dramatic downturn that has hit their industry. Stress balls were very much on the menu of free giveaways at some of the exhibitor booths at the The MAR /Hedge 5th International Conference on Hedge Fund Investments.

The crisis quickly led organisers to switch the opening panel discussion from one about the problems managers had handling the large influx of money into their funds, to worries about investor pullout.

Organiser Lois Peltz of Managed Accounts Reports Inc. said the theme of the conference was one of survival and growth. Instead of boom times, the industry was facing a credit and liquidity crunch and resulting uncertainty.

"The expectation is that there will be high redemptions, which could be devastating to some funds,'' she said.

With the Asian and emerging markets crisis, the mini mortgage meltdown in May and June, and Russia's default on its debt, hedge funds have instead started racking up huge losses.

The most notable disaster of the fallout has been the $3.6 billion bailout of Long Term Capital Management, one of the industries brightest stars until 14 banks had to step in to prevent a meltdown on Wall Street.

There are about 3,000 hedge funds in existence, and some had losses of about 50 percent or more during August. Many were over leveraged, borrowing large amounts of money on the assets they held. The financiers were only too happy to back their excesses as the 16-year bull market charged to the top. Now the squeeze in credit is being felt and funds -- including Long Term Capital -- are attempting to unwind their positions to get cash. As these positions are sold, the prices fall. Everyone, for example, are worried about what Long Term Capital is selling or about to sell.

In recent days US Treasuries have been falling amid speculation hedge funds were selling government debt to offset losses in other markets.

"Liquidity has dried up because there is terror in the market,'' panelist Richard Schulman of Tremont Advisors said yesterday.

Crunch time for many hedge funds, which speculate in financial markets for wealthy individuals and institutions, will come in the next two months depending on how many investors give notice that they want to get out.

The resulting shakeout will be good for the industry Fred Shuman of New York-based Archstone Partnerships said, noting that most of the people in the conference room were much poorer than they were a few months ago.

The industry, which grew to $175 billion in assets this year from $150 billion a year ago, is now shrinking rapidly. He believes the downturn will lead to a stronger industry after the shakeout.

"What were we thinking?'' he asked, while giving a run down of some of the attitudes that prevailed during the boom times in the industry.

Generally however he said most managers had done a good job in staying on top of the markets. With the selloffs there will be opportunities for unleveraged funds in the market.

He and others said the industry would have to provide more information about their strategies so investors knew more about what they were getting into.

Such information will be demanded as investors become more conservative.

Kenneth Lipper, founder and chairman of Lipper & Co., said hedge funds managers needed to exercise common sense and self discipline for the long term success of the industry. Lipper has about $5 billion under its wing.

Even if the industry has to shrink a little bit, he said, managers should turn away unsophisticated investors who didn't have a lot of assets. It will be up to the industry to lead the way and tell them the investment was not suitable.

"The easy money has been made,'' he said. "The next step will feature the fundamental, longer term investor.'' Conference Quotes `Liquidity has dried up because there is terror in the market.' -- Richard Schulman of Tremont Advisors *** `The expectation is that there will be high redemptions, which could be devastating to some funds.' -- Lois Peltz of Managed Accounts Reports Inc.

*** `The easy money has been made. The next step will feature the fundamental, longer term investor.' -- Kenneth Lipper *** `What were we thinking?' -- Fred Shuman of New York-based Archstone Partnerships on some of the attitudes that prevailed during the boom times in the industry.

*** HEDGER -- Kenneth Lipper, founder and chairman of the $5 billion investment management firm Lipper & Co. He is the former deputy mayor of New York, and the author of Wall Street, and City Hall, which were both turned into movies.

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