24/7 Wall St. – The idea of bailing out hedge funds or helping them in any way runs counter to the best instincts of most citizens, regulators, and law makers. The wealthy do not need a Good Samaritan.
Allowing hedge funds to fail is likely to accelerate and put pressure on whatever forces are in place that are moving down the markets. By some estimates, hedge funds control over $2 trillion. Most of the investments they have made involve some level of leverage. As those investments lose their value in the crisis, hedge funds have few resources to pay back the money which has created that leverage..
According to The Wall Street Journal industry experts are "expecting between 10% and 20% of the hedge-fund industry’s assets to be withdrawn by year end." That means a lot of investments will be sold off, and many of those will be stocks. An equity market recovery could certainly be undermined by that level of liquidation.