The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite� clauses, which do not include traditional default triggers, and “payment-in-kind toggles�, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.

Andrew Lahde, whom The Financial Times calls the best-performing hedge fund manager of the past two years, is closing shop and returning money to investors, the newspaper reported. Mr. Lahde, the founder of California’s Lahde Capital, has concluded that the risk of losing money from a bank collapse is too high, The Financial Times said.