Voltaire said, "Common sense is not so common" and George Bernard Shaw commented that having " ...enough of it was genius."

This reminds me of Warren Buffet, CEO of Berkshire Hathaway (BRK.A) or Steve Jobs, CEO of Apple Inc. (AAPL) that have both displayed plenty of the former and arrived at the latter in their business pursuits.

Derivatives like Collateral Debt Obligations, or CDO's, and Credit Default Swaps, get their value from something else entirely: total hype in an environment of smoke and mirrors.

It turns out that if you build layer upon layer of derivatives until you have no idea what the original underlying value truly is, it becomes so convoluted that a genius can't comprehend it at all. It is self evident that nobody could even determine all the counter-party risk.

Legendary investor (and pessimist) Jeremy Grantham made a bold pronouncement in a Bloomberg article earlier this week. Grantham, who is chairman of Grantham, Mayo, Van Otterloo & Co. LLC, which manages $150 billion, said that as many as half of all hedge funds will be forced out of business in the next few years. The primary cause will be losses in the credit markets.

The main culprit is, of course, credit gone mad in the form of subprime mortgages. Grantham is quoted in the Bloomberg piece as saying, "Probably the most stretched silly credit that ever walked the face of the earth was subprime, and that was the start of it." Subprime inspired a greater appetite for risk and return, and that demand generated a massive bubble in credit markets. When the bubble pops, a lot of investors will get hurt.

Grantham has long been a voice of caution -- and some might say reason. Earlier this year, he argued that virtually all assets are in a bubble right now. In an earlier article on TheStreet.com, he is quoted as saying: "From Indian antiquities to modern Chinese art ... from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!" The deflation of the bubble will take years, and as a result, only conservative investments make sense right now. Grantham is focusing on "high-quality" U.S. stocks and bonds. He also sees some hope for continued growth in select emerging markets. Presumably, he believes that the hedge funds that survive the coming implosion will focus on those areas.