do they really just close shop?

I'm guessing they have shitty quarters/years and people withdraw enough money that they have to close.

The problem any hedge fund manager faces is that they ask for very large fees. Of course, investors expect commensurately large returns - just keeping pace with the market is not enough When that happens, current investors leave in droves and it becomes very hard to attract new ones.

So the fund sells everything they have, returns money to investors as much as possible, and closes. The fund manager may or may not be able to try again later under a different name. But basically a new fund has to get really good returns fairly quickly or it dies.

Say what? Madoff got so out of hand because he existed for so long. Non-complacent investors expecting high returns and pulling funding quickly is precisely what prevents Madoff-like events from happening.