Hedge funds were basking in the sun a little more than two years ago. Their outperformance turned their managers into superstars. There was even a rock-and-roll-worthy confab called Hedgestock, where the uber-rich sipped champagne at the tony British castle Knebworth House while being entertained by the likes of Roger Daltrey of the Who.

It was the summer of love for hedgies, and the likes of Merrill Lynch, Bear Stearns, Goldman Sachs (NYSE:GS), and Barclays (NYSE:BCS) were willing to pony up for the title of founding sponsors of the $1,000-per-head shindig.

Sign of the times
When the SEC threatened to raise the net-worth requirement for investing in hedge funds from $1 million to $2.5 million, there was a general uproar. Yet as the boom in housing and stocks continued, hedge funds became more accessible by default. That worried some who figured that small-time individual investors were not savvy enough to cope with the extremes of volatility the funds exhibited.

And perhaps with good reason. There were a number of notable hedge fund collapses even during the good years. The demise of Long-Term Capital Management in 1998 may have been one of the more notable ones, but there have been plenty of more recent examples, too. Amaranth Advisors blew up after making failed bets in the natural gas markets. Two Bear Stearns hedge funds collapsed last year, in what was perhaps a harbinger of the company's fall and eventual sale to JPMorgan Chase (NYSE:JPM). And Carlyle Capital fell apart this year, even though it had invested primarily in Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) income securities, at the time considered safe investments. Maybe it was just a matter of time.

Yet the unwinding of positions at hedge funds has continued -- and many observers continue the trend to be a major contributor to the ongoing crash in the stock markets. As redemptions at hedge funds reach record proportions -- Morgan Stanley (NYSE:MS) estimates that U.S. fund managers may see a 15% decline in assets, while their European counterparts may witness a 25% withdrawal rate -- funds have apparently been dumping assets en masse and causing further pressure on share prices.

Now, hedge funds are seeing massive contractions in assets. In October alone, hedge funds suffered an estimated $115 billion in investment losses, according to the analysts at Hedge Fund Research. Coupled with redemptions of more than $40 billion, the resulting drop in assets under management was a record. And early results from November suggest that the trend is continuing.

Once the darlings of the market, hedge funds are now cast as pariahs. Some of the top hedge fund managers were called to task before the same Congressional committee that recently skewered the CEOs of Lehman Brothers and American International Group (NYSE:AIG).

As it conveniently forgets its own hand in the market's destruction, Congress casts about for a villain to pin the blame on. And while it considers putting disclosure requirements on hedge funds, the fund managers themselves may be right in wondering: Where has all the love gone?

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Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.