Few will have been able to resist a little Schadenfreude this week when the hedge fund industry took huge losses after the share price of Volkswagen soared.

Much of the industry - widely loathed as greedy, secretive and arrogant - had bet that the price of the German car manufacturer would fall. However, on Sunday when Porsche announced that it was mounting a takeover of the company, this gamble went disastrously wrong. The news sent Volkswagen's share price soaring and hedge funds scrambling to buy the 5 per cent of stock left available to cover the 15 per cent they had already borrowed and sold expecting prices to fall. At one stage, so many hedge funds were chasing so little stock that Volkswagen became the world's most expensive company, worth more even than the oil giant Exxon Mobil.

Farcical though this episode was, it offers a useful lesson to private investors on the scale of the hedge fund industry and its ability to move stock prices irrespective of traditional valuation methods, such as price/earning ratios and dividend yields.

Indeed, there is a very compelling argument to suggest that much of the recent downward movement in world stock markets has been driven by hedge fund redemptions and the way that the industry is financed, rather than the latest unemployment figures or corporate profit warnings.

Hedge funds usually augment the amount they can trade by borrowing money from the prime brokerage departments of investment banks. But with these banks becoming more cautious with their cash, many are increasing the amount of collateral (margin) that the hedge funds must deposit to guarantee the loans. To cover these higher margin calls, many hedge funds are having to sell whatever they can, which is usually the big and very liquid stocks that make up indices such as the FTSE 100 or S&P 500.

With the hedge fund industry now so huge, the simultaneous sale of so much stock has inevitably undermined prices. Sadly, this situation has become a vicious downward spiral because as the value of shares falls, the investment banks become more nervous about lending to hedge funds, so they increase margin calls further, forcing the industry to sell yet more stocks, which depresses prices more. To make matters worse, the wealthy clients of hedge funds are also demanding their money back, which is forcing the managers to sell ever more stocks and the cycle continues. The hedge fund industry is calling this the Great Deleveraging of 2008 and many believe that we are not through the worst of it yet.

So what does this mean for private investors? Well, rational analysis may suggest that many stocks are priced at bargain levels - some valuations are pricing in a virtual Armageddon - but this does not mean that there won't be further falls ahead. Private investors tempted to purchase shares now must understand that the stock market is not being run by rational human beings at the moment.

That said, there is some hope for the future. Hedge funds, banks, mutual funds and wealthy investors are hoarding massive amounts of cash. This money would usually be invested in equities and when it eventually moves back into the market, as it inevitably will, stock prices should start a rapid recovery.

The first beneficiaries should be defensive stocks with reliable cashflow, such as pharmaceuticals and tobacco companies. But nobody investing now should expect quick returns, nor should they jump into the market unless they can stomach some potentially painful short-term losses. Never has the long-term perspective been more important.

Credit card that is perfectly impossible to obtain

Credit card companies, or at least their marketing departments, do not appear to have heard about the credit crunch.

Barely a week goes by without more promotional literature dropping through my letterbox offering me yet another credit card or loan. With credit supposedly tighter than two coats of paint, you have to wonder why lenders are still cutting down forests in an effort to attract customers.

Capital One is a case in point. The lender has recently been promoting a credit card with one year's interest-free credit on purchases and balance transfers. In the current climate, this deal struck me as a little too good to be true, but undeterred I thought I would take advantage of the offer. However, my application was turned down and instead I was offered an alternative, and considerably less generous deal with a higher APR.

Incensed - and slightly worried - I thought that I had better check my credit file. I have always maintained a perfect payment history, so I could not understand why I had been rejected. I feared that perhaps someone had stolen my identity and started taking out loans in my name. But as it turned out my fears were just that and my credit file was squeaky clean. Indeed, Experian gave me a credit score of 978 (presumably out of 1,000) and said I was in the top 15 per cent of borrowers - I had to pay a very expensive £6 for such flattery.

So this got me wondering. If someone with a perfect credit history, and high credit score, does not qualify for this card, exactly who does? A bank executive perhaps? Then again, maybe not. Capital One, of course, refused to divulge how it comes to such decisions.

The only conclusion to draw is that the company's advertising is disingenuous. It is trying to lure customers on to more expensive cards by promoting deals that are virtually impossible to achieve. Borrowers beware.