By Joseph A. Giannone

NEW YORK (Reuters) - It wasn't too long ago big-time hedge fund managers like James Pallotta were erecting monuments to themselves. In Pallotta's case, it was a $21 million Georgian-style mansion he built in 2007 in Weston, a leafy Boston suburb uncomfortable with such displays of wealth.

Yet Pallotta soon would become a symbol not of conspicuous consumption but of the dramatic comedown of a once seemingly indomitable industry. In July, Pallotta, a protege of hedge fund legend Paul Tudor Jones, said he was liquidating Raptor Global Funds, a firm that once managed $9 billion but was hit hard by losses and redemptions last year.

He had plenty of company in that regard. After the worst performance in decades, investors yanked $300 billion of cash over three quarters starting late last year. And more than 2,100 funds were liquidated since the end of 2007, according to Hedge Fund Research Inc.

As if the market meltdown weren't enough, the hedge fund industry took a beating over Bernie Madoff's $65 billion Ponzi scheme one year ago, followed by the widening Galleon Group insider-trading case. The upshot is that an industry never comfortable with scrutiny and second-guessing has come under the microscope, with regulators and investors clamoring for change.

"Because of what happened, people will be very, very cautious about who they give their money to," said Joseph Perella, legendary dealmaker whose Perella Weinberg Partners manages $5.2 billion in assets. "Institutional money will look for places they view as secure, not just places that perform."

So what will the post-crash, post-Madoff, post-Galleon hedge fund universe look like?

One way or another, the wild west of American capitalism is expected to become just a little more civilized, humbler and almost certainly less lucrative, according to interviews with many industry sources.

A return to the golden age of fat fees -- usually 2 percent of assets and 20 percent of profits, though some stars charged much more -- and practically zero oversight is considered extremely unlikely, these sources say.

But will hedge funds resume their two-decades long dominance of the U.S. investment scene? That depends on just how tough the Securities and Exchange Commission, the Obama administration and their European counterparts intend to get.

In March, Treasury Secretary Timothy Geithner testified about plans to tighten oversight of hedge funds. The betting is mandatory registration with the SEC is inevitable. This is a requirement the industry has long resisted, fearing it would compromise their trading strategies by forcing them to show their hand.