To start with, the hedge funds were for the serious investor. The seriously rich got seriously richer by short-selling stuff.
Over the past two or three years, ordinary investment funds (such as pension funds) have got into the hedging game. This has made the game much larger and more automated, and therefore reduced the likely gains.
Short-selling has never been popular with governments. On "Black Wednesday" (1992) Sterling was forced out of the European Exchange Rate Mechanism by short-selling. One of the most vocal critics of short-selling has been the German politician Franz Müntefering, who has compared hedge-funds with locusts.
So it is perhaps fitting that hedge funds are reported to have lost billions on the German stock market, betting against Volkswagen. The Volkswagen share price rose dramatically yesterday, thanks to the intervention of Porsche. (I guess we know what cars the hedge fund managers won't be buying next year.)
Robert Peston, Hedge funds and VW: what a pile up! (BBC News 29 October 2008)
Gordon Raynor, Porsche and VW share row: how Germany got revenge on the hedge fund 'locusts' (Daily Telegraph, 29 October 2008)