It seems to me that the problems with the muni market began when it became clear that the monoline bond insurers were having problems and their backing of the securities could be worthless. Investors tried to unload many muni bonds before the possible downgrades and ahead of accounts that can’t hold lower rated bonds. While the market is large, it is spread among many issues, some of which rarely trade.

The panic and illiquidity played havoc with the yields and opened the door for the hedge funds. However, the market still didn’t return to normal and then they in turn became forced sellers, creating additional opportunity for the next set of buyers.

As a side note, hedge funds have great leeway to halt redemptions if there’s a run on the fund and rapid liquidation is not in the best interest of the limited partners. (It’s boilerplate language in all the offering memorandums.) However, the selling could be forced by lenders if they’re heavily leveraged.