Decent collision detection engines?

I know it’s not a answer to your question about collision detection. In any case I would try and use marvelous designer as I too find it way better for cloth simulation than native MAX. Maybe attach tubes to a circular patch and shrink that patch (not an expert here). But as for the creation of tassels maybe you can find these useful:

http://www.scriptspot.com/3ds-max/scripts/spline-fibers
OR
http://www.scriptspot.com/3ds-max/scripts/splines-scatter
OR
http://www.neilblevins.com/cg\_education/wirebundler/wirebundler.htm