Late Rally Falls Just Short

Hedge funds, like many others, have suffered huge losses in the wake of the housing market's collapse. Asset classes and derivatives connected to the mortgage-backed securities market plunged in value, and liquidity in the credit markets seized up.

The price of many types of securities started moving in odd directions, which sparked greater losses and more hedge fund blowups. The ensuing fright has led to redemptions en masse by skittish investors hoping to get their money out of the hands of risk-oriented hedge fund managers.

Sectors like basic materials, which have been havens for hedge funds due to the buyout and private equity rumor-mill, are seeing massive declines. Rio Tinto(RTP Quote - Cramer on RTP - Stock Picks) and Alcoa(AA Quote - Cramer on AA - Stock Picks) each fell as much as 10% before regaining some ground in the afternoon.

Blue-chips like IBM(IBM Quote - Cramer on IBM - Stock Picks) and General Electric(GE Quote - Cramer on GE - Stock Picks) haven't been spared either.

"Look at T-Bill rates," says Ken Fisher, founder of Woodside, Calif.-based Fisher Investments. "The spread between fed funds rates and T-bills should not be this elastic. This suggests to me that liquidity is being horded."

The shortest-term Treasury bills, like the four-week and three-month Treasury bonds, are safe places to park money, says Don Kowalchik, fixed income strategist at A.G. Edwards.

The yields there reached lows not seen in over a year at 3.4% for the three-month and 2.43% on the four-week -- down 1.6% in just one day. That's compared with a fed funds target rate of 5.25% on overnight borrowings.

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