While hedge fund managers did a better job of preserving capital than traditional asset managers in 2008, it was a disappointing year for hedge funds. Despite this, we strongly believe that the current shakeout in the industry is a net positive for long-term hedge fund investors, although significant near-term challenges for managers remain. In the current environment, manager selection is paramount. This paper provides recent historical context, reviews hedge fund performance in 2008, and discusses the rapidly shifting competitive landscape in the industry.