Hedge Funds' World of Hurt

The $50 billion defined-benefit Massachusetts Pension Reserves Investment Management Board, which reportedly lost about $30 million through its indirect investment in Sowood, says it is well diversified and has seen a good year so far despite the Sowood blip.

The $8 billion pension fund for International Paper(IP Quote), run by Robert Hunkeler in Stamford, Conn., has managed to avoid the pitfalls of investing with badly performing hedge funds, according to Hunkeler. He says he is happy with the pension's year-to-date performance, adding that through July, the fund's performance was greater than his expectations for the full year.

"We do run a very well diversified portfolio with a deep pension," Hunkeler adds. "If I made my first investment in hedge funds in the month of June, I wouldn't be very happy right now," he adds.

"Our first reaction [to the hedge fund collapses] was to try and get our arms around the situation," the IP fund manager says. "And at this point we think that it's more technical than fundamental."

The really scary prospect for many hedge funds, having sold off their most valuable and attractive assets, is holding onto the hard-to-sell junk that has been significantly devalued amid the market swoon. That has many investors envisioning more pain and waiting for more fallout from the financials, even as Capitol Hill and the Federal Reserve attempt belatedly to salve the market's wounds.

According to the hf-implode Web site, 13 other funds including Australian fund Basis Capital Fund Management and U.K.-based Queenswalk Investment are facing significant declines in value.

Still, this environment may prove ideal for some hedge fund players. Hedge fund Citadel Investment, which acquired Sowood's assets, has been one of the beneficiaries of the credit swoon and one of a handful of vultures in the wings ready to scoop up assets on the cheap.

After all, things have been worse.

"In the 10 years I've been with IP, we've seen worse periods," Hunkeler comments. "It's been a sharp correction so far but it hasn't been a deep one."