BOSTON (Reuters):

UNITED STATES financial regulators took a one-two punch on Friday that might leave their efforts to regulate the $1.3 trillion hedge fund industry in shambles.

"The regulatory landscape that the SEC has so carefully cultivated is now seriously in question," observed Jedd Wider, a partner at law firm Morgan Lewis.

The U.S. Securities and Exchange Commission will now have to go back to drawing board if it truly wants to put a tighter leash on an industry in which assets have doubled in five years. And that might take a long time, lawyers and investment managers said.

Early in the day, a former SEC lawyer described in detail how the agency last year quashed a probe into possible insider trading at a hedge fund later identified as Pequot Capital Management, one of America's best known funds with $7 billion in assets.

Hours later, a federal appeals court threw out the SEC's rule that required most U.S. hedge funds to register with the agency, thereby allowing SEC auditors to review their books and keep closer watch on them.

"It doesn't sound like it was a very good day for the SEC," said Richard Goldman, a partner at law firm Bingham McCutchen.