We've noted that hedge fund investors as of late have favored large established funds with solid track record and strong administration and compliance programs. Funds continue to flow in that direction.

How painful is it for smaller funds? Up to 20 percent of hedge funds may be liquidated soon, as fees and new capital dry up, a Merrill Lynch expert tells Bloomberg. "A large portion of managers are still below high-water marks. Performance is flat and money hasn't been flowing to smaller managers," he said.

This is perhaps already happening. When funds that control less than $100 million in assets shutter themselves, it often happens without a lot of attention. We're certainly seeing more deals involving alternative investment firms.

Since the onset of the credit crunch more than 800 funds of hedge funds have been liquidated, says Hedge Fund Research. The number of hedge funds has also fallen 9 percent, from 7,634 to 6,982. That said there will always be start-ups and fund seeders. The low end of the market is actually quite active, chock full of dreamers.

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