Funds of hedge funds are tasting sour. The Financial Times reports that a Standard & Poor's review of funds of hedge funds found that dollar-denominated ones were down 140 basis points in the second quarter.

Randal Goldsmith, the review's author, points to the stock market drop in May as part of the problem. Some funds of hedge funds even exaggerated the drop.

"We suspected that funds of hedge funds might be vulnerable to a correction in equities after portfolios took on a more directional appearance in the previous quarter," Goldsmith told the Times. "We did not expect that they might farce worse than equities but many actually fell more than related equity indices."

Goldsmith added that hedge funds just are not good at correcting from such drops.

"Investors may need to think carefully about market conditions," Goldsmith mused, "despite hedge funds' general aim for absolute returns at all times." 

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