Which Way Out?

Illustrations for TIME by Paul Blow

Hedge-fund managers will not look back on the summer of 2007 with fond memories. The first half of the year had gone pretty well. Investors had poured record amounts into the funds, to the tune of $135 billion through July, exceeding the total $126 billion that flowed into the sophisticated, shadowy investment vehicles in all of 2006. Most hedge-fund managers were enjoying solid returns: the industry averaged a 7.37% gain through the first seven months of the year, according to Hedge Fund Research (HFR), a Chicago research firm. That was nearly double the performance of the benchmark S&P 500...

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