Basically, during this period of insecurity and uncertainty, hedge funds are bracing for a series of investor withdrawals, which will force some hedge funds to dump investments (including distressed assets).

According to James McKee, director of hedge fund research at San Francisco consulting firm Callan Associates, “Everybody’s watching for redemptions, and there could be a cascading effort, where redemptions cause other redemptions.”

Some hedge funds are losing money, and some of closing down entirely.  Over 350 have been liquidated so far this year, up about 24 percent from last year.

So where’s the good news in all of this?

For those hedge funds and investors who have the assets, bravery, and patience to weather this storm, they will benefit from seeing many of their competitors vanish.  Furthermore, not all in the industry have lost faith in hedge funds.

David E. Smith, CEO of Coast Asset Management, a Santa Monica, Calif. based fund worth $5.6 billion, believes that “It’s clearly been a very tough year for investors in general, but I think hedge funds have done a good job of navigating very tough markets and don’t get the type of recognition that they should.”