The Year Hedge Funds Got Hit

Indeed, in October, the management board increased the portion of its investment in hedge funds by one percentage point, to 11 percent of the pension fund. And the municipal pension oversight board likewise decided to allow cities and towns with funds as small as $150 million to follow suit.

Nonetheless, many of the investors lining up to get their money back are pension funds and endowments. Pennsylvania has redeemed $1 billion, though Massachusetts has not sought to withdraw money.

Last month, five hedge-fund managers who each made more than $1 billion a year were called before Congress to discuss the industry's role in the crisis and the case for regulation. Four of the five said they thought that hedge funds could pose a systemic risk to the economy. "Any institution that has a pool of capital at its availability and uses reckless leverage indeed poses a potential systemic risk to the marketplace," said Philip A. Falcone, manager of Harbinger Capital Partners.

When pressed, the hedge-fund gurus agreed that they could probably live with some form of disclosure to a federal banking regulator, as long as the data are not shared with the public.

Understandably, some fund managers see opportunity in the economic turmoil. "Markets are a train wreck," Singh told investors, "and there is substantial opportunity to profit handsomely."

Staff researcher Robert Thomason contributed to this report.