Are Hedge funds in trouble ?

Economist's recent article on Hedge funds has me worried and happy at the same time. The article, however, suggests that the poor performance of the Hedge fund industry is perhaps exxagerated. The industry is ripe for a shakedown and good funds (and fund of funds remain), managed by good managers and innovative strategies, will survive. This will, in turn, help consolidate the industry. This loosely translates that there will be good oppurtunites available for financial engineers in the longer run, because the emphasis would be on sound strategies and research.

From Economist:
Hedge funds are lightly regulated investment funds that take high risks to earn high returns. They come in many flavours, and have long been the bane of emerging-market governments, who claim that the funds are destabilising. Their case in point is Long-Term Capital Management, which had to be rescued in 1998 after market liquidity unexpectedly collapsed. Hedge funds subsequently struggled to gain investors' trust, but by early 2003 macro hedge funds were reviving, and even conservative Germany and Japan began to embrace them. Now the problem may be too many hedge funds—as more managers chase opportunities in each market, returns have fallen. Mutual funds that invest in hedge funds are also becoming popular, though they may be worryingly less diversified than their managers believe. In America, the Securities and Exchange Commission is contemplating tighter regulation.