The market turmoil of recent months is set to have long-term implications on the hedge fund industry, including much more regulation, a panel of industry experts said on Monday.

Speaking at a Toronto conference on alternative investments, Leon Chin, partner and leader of the Canadian hedge fund practice at Ernst & Young LLP, said the events of recent months have significantly boosted skepticism among hedge fund investors.

As a result of the Bernard Madoff scheme south of the border, many institutional investors are now much more focused on due diligence, Chin said. Pressure is on the rise for hedge funds to open their books to due diligence professionals.

“This should be a standard procedure,” he said.

Still, Chin said the hedge fund industry remains relatively strong. While significant redemptions are occurring, they are not “catastrophic,” and the majority is coming from fund of funds. While some pension funds and other institutional investors are demanding more scrutiny from hedge funds, most are still largely maintaining their investments in the funds, he said.

“The pension fund institutional investors are for the most part staying put,” said Chin.

Furthermore, while many speculators expect to see a wave of hedge fund failures in 2009, Chin said he has yet to see such a trend. The next six to nine months will be a crucial test of survival for funds, he said.

The biggest concerns for major hedge funds in Canada and the United States are redemptions and the loss of investor confidence, Chin said.

While previous attempts to establish stricter regulations for the hedge fund industry have failed, Chin expects the significant public attention on hedge funds to result in greater regulation in the near future. In particular, he expects that funds will be subject to periodic reporting requirements and that fund operations will face periodic exams and scrutiny.

Some hedge funds would resist such regulation as an administrative burden, but Chin said funds would comply if the rules are best for the investment industry.

Paul Mayer, vice-president of hedge fund company Polar Securities, said his company would not resist greater regulation in the industry.

“We’re not worried about regulation, because it certainly brings in some new standards to the industry,” he said.

Even in the absence of new regulation, greater transparency and greater due diligence is likely to become much more common, Mayer noted.

“What we found with the Madoff scandal is that institutions and fund of funds and high net worth individuals that got caught didn’t do their due diligence,” he said. “We’re in a new environment whereby institutions and fund of funds will do their due diligence.