“There are only so many market inefficiencies out there to profit from,” Papamarkakis says, biting into a chicken-salad wrap. “The actual alpha you can generate in these markets is, by definition, finite.”

Disappearing Funds

Papamarkakis, who has lost money before and recovered, says the future of hedge funds lies in being savvier about quantitative techniques. He, like Effron, also says the industry needs to shrink for survivors to make money again.

Fischer, who started his fund more than two decades ago, sees the industry bifurcating into large firms with tens of billions of dollars in assets and smaller funds like his trading niche strategies. But he says survival depends more on a change of attitude.

He was, in his own words, the “stereotypical hedge fund a--hole,” driving fast cars and flying around on private jets. Basso Capital, which managed a peak $2.9 billion in 2008, lost money that year for the first time and struggled to recoup assets. Fischer says he hit rock bottom “emotionally, psychologically and economically.”

A leadership course he took three years ago changed his life. Now, Fischer says, he’s less of an eat-what-you-kill capitalist and more of a social-impact investor who reads books on the environment, watches TED talks and shuns private-jet travel. At his hedge fund, which is up 4.8 percent this year and trades convertible bonds, a smaller market has allowed him to exploit mispricing opportunities. And lower-fee funds have attracted investors, helping to bump up assets.

Losing Clients

While Fischer was able to turn things around, many competitors are out of business because of their arrogance and inability to adapt to a changing investing world, he says.

He compares the hedge fund industry to big-box retailers like J.C. Penney Co. and Toys “R” Us Inc. that were once aggressive, innovative and highly profitable. Now they’re too large and commoditized, with little chance for growth, he says.

Fischer recommends that his peers take a break and put their skills to a different use that may help them feel better about themselves.