After the banks, talk was that hedge funds would be next. The prediction has proved correct - but not in a way anyone imagined. It was always supposed that as the recession deepened, hedge funds would struggle to make their returns and clients would want their money out.

That is what happened with the Bernard Madoff scandal, but what the rush to redemption exposed was something far worse than a stuttering performance - fraud on a vast scale. Madoff's extraordinary ability to hoodwink the investment community, including other hedge funds, has brought into question the industry's future.

Throughout the glorious decade just finished, the hedge funds told everybody how brilliant they were. It didn't pay to ask questions, partly because the answers were convoluted but also because their alchemy was a trade secret. Madoff was able to prey on this need for secrecy, with devastating effect. Now investors want to know how many other Madoffs there are.

But the industry's love of scant information means nobody knows. The fear stalking the hedge-fund operators is that clients are not going to hang around to find out - they are going to demand their money back. The arrogance upon which they built their mystique could prove to be their undoing.

In London, Antonio Borges, a former senior Goldman Sachs executive, is as near as there is to a frontman for a profession that doesn't do frontmen. He's emerged this week to defend the seemingly indefensible, an industry that has seen some of its highest-profile members hang their heads in shame as they confessed that client money had just disappeared in Madoff.

Though he was based in the US, about 45% of the $25 billion losses that have been so far admitted can be pinned on organisations - Fairfield Greenwich and FIM Kingate Management - that had offices in London's hedge fund heartland of Mayfair and St James's.

But don't believe everything you read about the demise of the industry, says Borges, who is chairman of the Hedge Fund Standards Board, which this year has for the first time laid down thresholds of transparency, governance, oversight practices, valuation procedures and management behaviour.

"I do not doubt that the hedge fund industry has a very bright future," he says. Borges dismisses the claim the financial crisis is the fault of the hedge funds, claiming that charge should instead be levelled at the mainstream banking industry.

He denies too that client withdrawals are crippling hedge funds, saying it is simply asset reallocation - investors limit themselves to a certain amount to be invested in hedge funds. and when the value of their mainstream investment goes down, portfolios need to be reweighted and hedge-fund positions liquidated. Borges pours scorn on the claim his new role is evidence standards have been poor, and those who do not sign up to his board are operating at the dirty end of the industry.

On the contrary, he says, new standards are the signs of a maturing industry. As to those who don't throw themselves into his board, the market, in the shape of the investment community will decide if they can be trusted.

So if the industry survives, does it matter hedge funds will continue to be the pariahs of the financial world? "Hedge funds need to be loved by their investors," says Borges. "If they are not, they will not exist."

Their refusal to open themselves up, he maintains, is not entirely their fault. "They have been unable to persuade the man in the street they should be loved. That is because they cannot communicate with him, they cannot promote to him - they cannot advertise to him because they're not allowed to market to the retail investor.

"Therefore there is a degree of misunderstanding. The man in the street cannot see through the fog." This is a rich argument. By wishing to remain on the outside, hedge funds are seen as shadowy. Now the Madoff case has punctured that reputation, they can no longer have it both ways.

Says Borges: "The solution has to be for the hedge fund industry to explain their value, to create that better understanding."

If they are to survive, closer regulation and transparency are the only route open to them. The reverberations of Madoff are only just beginning.