Hedge Funds Hit the Wall

July couldn't end soon enough for most investors, but hedge fund watchers say the worst could be yet to come.

Hedge funds have bet heavily on the junk bond market, which just completed its worst month in five years. As some heavily leveraged funds count up their month-end profits and losses, some observers fear they know all too well what will follow.

"Having amplified returns on the way up, leverage now amplifies the declines," writes Jeffrey Rosenberg, head of credit strategy research at Bank of America. He adds that "month-end marks and tightening of leverage terms now challenge hedge fund liquidity -- potentially leading to an existential crisis for many." ...