The widespread selling by hedge funds has taken a heavy toll on credit markets in recent weeks, and investors are wondering whether equity markets will be next. Analysts argue that forced selling by equity hedge funds, who own about USD 1 trillion in stock across the world, would be deadly for stock markets threatened by economic slowdown, weakening company profits and sky-high oil prices. There may be early signs of trouble for equity hedge funds, but they are unlikely to face the same magnitude of problems as their highly-leveraged credit market cousins, who have been forced to sell as lenders demand their money back. Additionally, following the reduction of interest rates by the U.S. Federal Reserve, the fear of losing out on any equity upswing is pushing hedge funds to buy stocks.

"Even a highly levered long-short fund would be two times levered, compared to five times for credit funds," said John Godden, chief executive of specialist hedge fund consultancy IGS Group Ltd. "It is true that people are having leverage withdrawn across the board, but I don't see equity fund selling causing markets to fall because leverage levels are not that high and liquidity levels have not dried up." Actually, equity hedge funds have done reasonably well recently, falling less than shares, and have been closing out short positions, or buying stock. "Hedge funds are not at the heart of the fall—in credit, yes, but not in equities," said Alain Bokobza, chief strategist at Société Générale.