When hedge funds blow up, losses can extend far beyond their investors. Markets can sink along with the fund and individual investors see losses as a result of the turmoil.

When Long Term Capital Management failed in 1998, the Dow Jones Industrial Average fell almost 17 percent in two months. A multibillion dollar loss at Societe Generale in January 2008 pushed the Dow down more than 10 percent in one month and European stocks lost as much as 6 percent in one day.

The Societe Generale losses also illustrate that policymakers may not know as much as they would like to. Markets crashed in Europe as U.S. markets were closed for a holiday. Seemingly in a panic, the Federal Reserve announced a rare emergency rate cut between meetings.

Over the past month, the bond markets have shown signs of another hedge fund crisis. The identity of the fund is still unknown, but someone sold bonds heavily. The Fed is buying $45 billion of Treasury bonds a month, yet sellers pushed the price of the 10-year Treasury down 2.8 percent.

In order for prices to fall, there must be more sellers than buyers. We do know the Fed is a big buyer in that market, so there must have been an even larger seller.

In the futures markets, we have seen large declines in the long positions of hedge funds in bonds, stocks, metals and grains.

If a hedge fund gets in trouble, it will usually try to unwind its positions without revealing what it is doing. We see prices fall and when it stops selling, the declines stop. Without knowing who is selling, there is no way of knowing whether they are done or not.

Unless prices stabilize in the stock market over the next few days, it is likely that we will see hedge fund selling accelerate, causing losses for individual investors.