Despite conviction that hedge funds are justified in their underperformance compared to market benchmarks due to their supposed insulation from volatility through a combination of long and short bets, the industry took a painful hit during this week's market crash. William A. Ackman, CEO of Pershing Square Capital Management and one of Wall Street's successful investors, revealed to his investors on Wednesday that the firm has lost all of its gains for the year. Bridgewater Associates, the largest hedge fund in the world in terms of assets under management, was down 4.7 percent for the month on its Pure Alpha fund. The Pure Alpha fund had previously been up 11.8 percent for the year.

Experts uniformly point to worries about China's slowdown and the looming rise of interest rates by the Federal Reserve, but are divided in their outlook about the market. China's economy has been the source of worry since June, when its market plunged and required regulator intervention. Similarly, as China's stock market plunged this week, regulations stepped in to make borrowing and investing more appealing by cutting interest rates and allowing municipal pension funds to be invested in the stock market. However, these measures did not prove drastic enough to abate fears of a "Black Monday" in both China and the United States, which prompted further selling. Fears about an increase in the Federal Reserve's interest rate for the first time in six years are also plaguing investors as they worry that the market will contract once the interest rates are raised. 

Some still believe that there may be a quick turnaround in store: the New York Stock Exchange rose 4% on Wednesday, its highest one-day increase since 2011. Some investors also believe that now is a good opportunity to buy, with oil hovering just below $40 a barrel and well-regarded stocks such as Intel, Apple, and Walt Disney going down between 5 and 10 percent. According to Morgan Stanley, an American investment bank, hedge fund managers bought a record number of stocks in the past week. Ray Dalio, CEO of Bridgewater Partners, even said that he believes the Federal Reserve will hold off on raising interest rates and continue providing markets with liquidity. 

As the market improves, it remains to be seen if hedge funds will be able to recover their losses for the year. For the sixth year in a row, hedge funds have been predicted to underperform the S&P 500 and this market crash will provide a significant obstacle to overcome for year-on-year growth. Although hedge funds that shorted stocks have benefited greatly from this market crash, the industry as a whole was poorly positioned for the sell-off: $1.5 trillion were in long positions as opposed to $684 billion in short positions. With the fundamental value proposition of hedge funds damaged this week, it may be hard for some investors to choose to continue paying the high management price that a hedge fund commands.