Investors may take comfort if they believe it's darkest before the dawn, because right now it's pitch black.

The banking and credit crisis have led to the forced deleveraging of institutional investors around the globe who are no longer capable of borrowing to sustain their positions. This has unleashed protracted, record-setting volatility across virtually every asset class as overleveraged investors, led by hedge funds, unwind from stocks, bonds, property, commodities and currencies.

In past bear markets, huge price swings would hit like an ocean wave that eventually subsides after it strikes. But the energy in today's tempest seems to be feeding on itself like fissionable material and continues to rock asset prices daily.

It's been a year like none that anyone managing money has ever seen. "It is now consensus," says Jan Loeys, head of global market strategy at JPMorgan, "that we are in a severe world financial and economic crisis, the worst since World War II." And unlike past sell-offs where there was cover in certain sectors and foreign bourses, investments across the board have gotten slammed as years of gains have been wiped out.

Once sure-footed funds like large-cap growth Fidelity Magellan and Legg Mason's Value Trust have tanked 45.59% and 52.02%, respectively, the price of the former reeling to 2005 levels, the price of the latter to those of 2003.

The only equity fund category in the black this year is bear funds shorting the market. According to a recent Morningstar survey prepared for Financial Advisor, these funds are collectively up more than 40% for the year through October 30.

An Unmitigated Bloodbath
Morningstar reported that U.S. diversified equity funds have lost more than 36%. Growth funds were off 38.59%, while value funds did little better, sliding 34.16%.

Diversified foreign equity funds collapsed as well, by more than 45%, as global investors sought sanctuary in the dollar, curbing the tailwind such funds' investors had at their backs when the U.S. currency was declining. The rallying dollar exaggerated losses in eurozone securities by 9%, and in Australian investments by nearly 17%. This meant the United States was the second-best-performing market in the developed world in dollar terms, down 33% for the year through October, according to MSCI's country indices. Only Switzerland performed better, off by 29.05%.

The hope that certain foreign markets would be uncorrelated and investors protected by decoupling has died a sudden death. Europe isn't generating the economic thrust necessary to drive the global economy in the absence of U.S. growth. And emerging markets are staggering as developed markets fall into recession.

Morningstar found that European stock funds have lost nearly half their value in dollar terms since the beginning of the year. Emerging market funds were down by more than 54%.

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