Over the past 40 years, studies by Moody's Investors Service (MCO) have shown that the median trading price of defaulted muni issues 30 days after default is 59.5 cents on the dollar -- as opposed to 37.5 cents on the dollar for defaulted senior unsecured corporate bonds. While corporations can be liquidated and bondholders get what they can grab, states and municipalities will mostly be righted -- their debt payments lowered and their maturities extended. So, to keep the capital markets open to states and municipal issuers, bondholders will eventually be made close to (or completely) whole, which means most or all principal and interest will probably be paid. You don't have to be a hedge fund to play in this sandbox. You may not be able to buy credit-default swaps on muni bonds, but you can short the iShares S&P National AMT-Free Muni Bond Exchange-Traded Fund (MUB). It's currently trading at roughly $100. If you short the ETF there, and put in a 10% stop- loss order at $110 to cover the position if it goes against you (which is a great stop position because MUB has never traded that high), you'll be in a perfect spot to play the swoon in the muni- bond meltdown. And when the yields on munis approach the double digits, or you've reached your profit target, cover your position and buy, buy, buy. There you have it. With your newfound strategy in hand, all you have to do is get the timing right. And, if you do, those hedge-fund folks will never seem invincible again.