Hedge Fund turmoil

The chart above gives you a very good indication of what called "bloodbath ahead" in the hedge-fund industry.

No one wants to invest in an underperforming hedge fund right now -- and half of the hedge funds in America are underperforming. What we see in the chart is the enormous range of returns between the best-performing and wosrt-performing hedge funds -- a range which has never been wider.

In any event, the hedge-fund shakeout over the coming months could be brutal, and have nasty systemic consequences if hundreds or thousands of hedge funds are all trying to unwind their positions at the same time. In the worst-case scenario, a fund which wrote a lot of credit protection could go bust, leaving its investors with nothing and its counterparties with very little. If the counterparty dominoes then started to fall, the financial system could end up in much worse shape than anything we've seen so far.