TheStreet.com's Jim Cramer highlights the latest example of how people were scared out of the market at exactly the wrong time so you won't get spooked next time.

When Sowood and the Bear Stearns (NYSE: BSC) (Cramer's Take) leveraged investment funds blew up this summer we were supposed to get ready for a wave of redemptions that would buckle the market.

"Just wait until October" became a familiar refrain as hedge funds were expected to get shelled, causing tons of stocks not to trade the way they should as unnatural margined selling took its toll.

But here we are in the first week of October and spreads for arbitrage, a pure tell for fund redemptions, are tightening, not loosening. The averages are at or are close to hitting new highs and we haven't heard of any funds about to go belly-up. The only ones that would fail, I believe, would be short funds.

I bring up this sore but positive topic because when things were really bad at the end of August yet redemptions hadn't overwhelmed the market, we figured it might just be a September phenomenon. Making things a little more likely, too, were the funds that were exposed to all of these exotic instruments based on mortgages.

So far it looks like the huge hedge fund redemptions and failures aren't going to happen, perhaps courtesy of the Fed's rate cuts that now do seem to have bailed out a lot of managers who have made wrong moves. That's the "moral hazard" that everyone was fretting about so much before the Fed acted.

But I think that instead, you should let this memory of "redemption worry" be a reminder of the phantoms that freak people out and make them leave the market at what now represents 1,000 points on the Dow.

Oddly, there are still some stocks that seem pressured down more by fear than by fundamentals. Genesis Lease (NYSE: GLS) (Cramer's Take) and Aircastle (NYSE: AYR) (Cramer's Take) both have terrific yields, a function of the decline in the stocks of aircraft lessors. Some of these are owned from hedge funds believed to be struggling. The other is Enterprise Product Partners (NYSE: EPD) (Cramer's Take), also with a good yield, that is in the energy transport business.

Neither industry is hurting but the stocks had some really weak hedge fund hands as shareholders.

These could be payoffs from the distressed period and redemption fears that drove them down.

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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup.

Hedge fund managers are all afraid of one day each month -- the 15th. For the normal American this day doesn't signify much. But for fund managers this is the last day when hedge fund investors can redeem (withdraw) their money from hedge funds.

According to a New York Times article, credit funds and quantitative funds are expected to be the ones hardest hit by redemptions. The reason for this is simple to understand: many credit funds had subprime exposure and were hit hard due to drastic repricing in the subprime market and quantitative funds, notorious for group thinking, were hit hard when volatility spiked and funds were forced to begin closing their positions creating a death spiral in their positions.

Experts expect "hot money" such as funds of hedge funds based in Switzerland to be the first to withdraw money and move into less-leveraged funds according to the Financial Times.

In response to these fears, some managers are even prohibiting redemptions from their funds because it would force the funds to sell their positions at a steep discount. One such fund is Sentinel Management Group as the Associated Press reported here.

Today could be a make or break day for many hedge fund managers, especially those with a concentrated investor base.

According to Marketwatch, investors fled global equity mutual funds to the tune of $2.39 billion last week, compared to a net in-flow of more than $2.7 billion in the week prior. What does this mean? If we use the lemming-like retail investors as a contrarian indicator, this is a screaming buy signal.

But there's a problem for mutual funds: If these retail investors are prone to buy at the tops and sell at the bottoms, their redemptions force mutual funds to buy and sell at precisely the wrong times. In January, I wrote about how this trend can effect mutual fund performance. I referred to a recent study that has shown that "liquidity-motivated trades" underperform trades made based on fundamentals. Mark Hulbert has suggested that investors consider using ETFs which, because they are closed-end funds, are not as vulnerable to shareholder redemptions.

I believe that investors should take a long look at exchange-traded funds for this, among other reasons. ETFs are often lower cost, easier to trade, and ideal for making macroeconomic bets. To learn more about ETFs, visit etfconnect.com.

Individual investors gradually are coming home to domestic mutual funds after running from them since early May through mid-September. TrimTabs, an investment research firm that tracks the money flows of mutual funds reports that between Oct. 3 and Oct. 16, U.S. domestic mutual funds received $1.2 billion in new cash, which is an average of $170 million per day. Most of the year, domestic mutual funds were bleeding cash as investors moved to world or international stock funds. In fact, the daily outflow of cash averaged $270 million from May through August 2006.

To put this in perspective, the daily inflows of cash remains well below the amount of cash that went into domestic mutual funds in 2000, before the Internet bubble had burst. In 2000, average cash inflows for domestic mutual funds was $1 billion and annual inflow was $259 billion. For 2006, cash inflow to U.S. equity mutual funds averaged $100 million daily and its annualized inflow is projected to be just $25 billion. 2001 and 2002 was the only recent period of inflows lower than that, with an average inflow of just $15 billion annually.

Why should this matter to mutual fund investors? When mutual funds bleed cash it means that managers must either keep more of the mutual fund's portfolio in cash to be able to meet the redemptions or they could be forced to sell assets in order to give exiting fund holders their money. Maintaining a larger portion of a portfolio in cash means a slower growth rate, since cash doesn't have as much potential for growth as a stock investment does. Being forced to sell assets can result in a loss for the portfolio, especially if the stock being sold is not in a gain position, or it can mean significant capital gains distributions at the end of the year if a significant portion of the stocks that had to be sold had long or short term gains. Either way, the mutual fund holders that stick around can be hurt when a mutual fund experiences large outflows of cash. With the recent increase in inflows, this could now change.