Hedge Funds' World of Hurt

Remember when Wall Street would obsess over the next leveraged buyout candidate, and hedge fund masters of the universe could raise ungodly war chests with just a handful of phone calls?

What a difference a few months make.

Lately, hedge fund implosions have replaced the LBO parade as the market's signature event. Investors have seen huge setbacks at funds run by Bear Stearns(BSC Quote), UBS(UBS Quote) and Goldman Sachs (GS Quote), among others, as the credit environment has grown fraught with uncertainty and lurking turmoil.

Now investors find themselves wondering how institutional investors will respond as the wheels come off the once-fast-moving credit wagon. Will pension funds and other conservative types of investors, who had just begun pouring money into these so-called alternative investment vehicles in earnest, back away from hedge funds in their hour of need?

For now, the answer seems to be no, as the damage from this summer's credit crunch has been limited. Still, there are worries that we've seen only the beginning of the problems in alternative-investment land.

"Hedge funds and private-equity firms today are like the dot-coms in 2000: Ask for money and you'll get it," fund manager Ray Dalio of Bridgewater Associates said in Barron's back on May 26. "They bid up the prices of everything. The amount of money flowing is almost out of control, and it's making everything overvalued."