If Sherlock Holmes was analysing the credit crunch, he would be drawing our attention to the dog that didn’t bark, just as he did in The Hound of the Baskervilles.

The dog would be hedge and private equity (PE) funds.

Anyone tracking markets in recent years will remember the prediction that the unregulated, feverish trading of hedge funds, and the massive debts and complex financial engineering of buyout firms would cause the next crash.

The crash happened, but it was started by what appeared to be safe institutions. It was the relatively dull mortgage lenders, and the investment banks that supplied their funding through the wholesale money markets, which sparked the collapse.

The dog didn’t bark. That doesn’t mean it won’t. The hedge and PE funds will be the next dominos to fall. Just as the last few months have been dominated by bank bailouts, we will soon hear more about the sinking of alternative asset managers.

The funds have so far avoided the worst of the crunch. There is a simple reason: They were more conservatively managed than many people gave them credit for. They took fewer risks than the investment banks, largely because they have their own money tied up in the businesses they are running.

Now the pain is starting to spread. The hedge fund industry lost $79 billion (Rs3.86 trillion today) through asset price declines and investor withdrawals during September, according to Singapore-based research and publishing company Eurekahedge Pte Ltd. Executive search firm Options Group estimates that there may be as many as 10,000 job losses in the industry this year.

Share prices also suggest a bleak future. Man Group Plc., the world’s largest publicly traded hedge fund, has dropped to 352 pence (Rs299.55) from 600 pence in July. RAB Capital Plc., another star of the industry, has slumped to 13 pence from 126 pence last year. It’s hard to see anything positive in that.

The outlook for buyout funds is also turning scary. Candover Investments Plc., a British PE firm, said last week the looming economic slowdown was likely to hurt the value of its investments.

Hedge funds will suffer because they won’t be able to leverage investments anymore. The credit won’t be available. They will face more restrictions as part of the regulatory backlash that will be the inevitable consequence of the market turmoil.

Buyout funds, likewise, relied on debt markets to finance acquisitions. Investors’ appetite for the intricate financial engineering employed has vanished.

Both types of funds boomed in an era of turbocharged innovation. They were satellites to the investment banking economy that has now collapsed. There won’t be much space for financial buccaneers, precisely what the hedge and PE funds had become.

They will struggle, and the dog is barking.