In many cases, the reversal of fortune suffered by individual funds dovetailed with their exposure to risky commercial real estate investment. "Hedge funds are momentum-driven, and many of them shifted gears to focus on real estate," says Dan Fasulo, managing director with Real Capital Analytics. "Let's face it--between 2005 and 2007, real estate was the flavor of the year."

An article last week in the New York Times noted that "hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis." Fasulo tells GlobeSt.com that the issue wasn't ill-advised investment decisions. "But there's no question that a lot of the deals and positions they took were on the risky side of the spectrum, and subsequently that has come back to bite them because of how quickly the market has changed." As an example, he cites Fortress' bridge loan to Macklowe Properties on its $7-billion acquisition of the Equity Office portfolio, an acquisition that ended in the piecemeal, discounted sale of that portfolio earlier this year.

"These are high-risk, high-return players," Fasulo says. "Many of them saw that their peers had invested in CRE earlier in the cycle and made tremendous returns. So everyone wanted in on the party. It's the hedge funds that had huge positions built up when the music stopped that are really in serious trouble."