NEW YORK (Reuters) – Neil Chelo’s job is to be able to tell good hedge fund managers from not-so-good ones.

An investment analyst, Chelo honed his skills under the tutelage of Harry Markopolos, the forensic fraud investigator widely credited with spotting Bernie Madoff’s Ponzi scheme years before it imploded. And the most important lesson he learned is you have to ask lots of questions.

“I’m not a conference room type of guy,” sniffed Chelo, director of research for Tacoma, Washington-based Benchmark Plus, a $1.8 billion so-called fund of hedge funds that invests money with 25 managers. “It’s very easy for people to fake it for two hours in a conference room, but it’s a lot more difficult if you are at their desk going through their portfolio.”

Chelo, 39, typifies the new, harsher reality facing the $1.9 trillion hedge fund business. In the aftermath of the industry’s generally terrible performance during the financial crisis, institutional investors such as pension funds, university endowments and non-profit groups are far more finicky about where they put their dollars.

These newly-empowered investors are increasingly demanding — and receiving — a cut in fees, as well as provisions that require managers to meet certain performance goals and provide greater flexibility to ditch a fund if it flounders. And like Chelo, they are also doing a lot more snooping around before writing a check.

Gone are the days when a trader could leave some Wall Street firm with a few of his buddies, snap his fingers and raise several hundred millions of dollars overnight. While new hedge funds are launching all the time, industry observers say more money is going to either established funds or upstarts led by traders with a well-known track record, like those coming off of Goldman Sachs (GS.N: Quote, Profile, Research) proprietary trading desks.

“For the biggest funds there’s no question the investor is ruling the roost,” said Stephen Keller, managing director at Bank of America Merrill Lynch’s prime brokerage.

NEW YORK (Reuters) – Neil Chelo’s job is to be able to tell good hedge fund managers from not-so-good ones.

An investment analyst, Chelo honed his skills under the tutelage of Harry Markopolos, the forensic fraud investigator widely credited with spotting Bernie Madoff’s Ponzi scheme years before it imploded. And the most important lesson he learned is you have to ask lots of questions.

“I’m not a conference room type of guy,” sniffed Chelo, director of research for Tacoma, Washington-based Benchmark Plus, a $1.8 billion so-called fund of hedge funds that invests money with 25 managers. “It’s very easy for people to fake it for two hours in a conference room, but it’s a lot more difficult if you are at their desk going through their portfolio.”

Chelo, 39, typifies the new, harsher reality facing the $1.9 trillion hedge fund business. In the aftermath of the industry’s generally terrible performance during the financial crisis, institutional investors such as pension funds, university endowments and non-profit groups are far more finicky about where they put their dollars.

These newly-empowered investors are increasingly demanding — and receiving — a cut in fees, as well as provisions that require managers to meet certain performance goals and provide greater flexibility to ditch a fund if it flounders. And like Chelo, they are also doing a lot more snooping around before writing a check.

Gone are the days when a trader could leave some Wall Street firm with a few of his buddies, snap his fingers and raise several hundred millions of dollars overnight. While new hedge funds are launching all the time, industry observers say more money is going to either established funds or upstarts led by traders with a well-known track record, like those coming off of Goldman Sachs proprietary trading desks.

“For the biggest funds there’s no question the investor is ruling the roost,” said Stephen Keller, managing director at Bank of America Merrill Lynch’s prime brokerage.