So far this year, Blue Mountain's Credit Alternative hedge fund is down only 2.4%. Compared to its peers -- it's a pretty good performance.

But for battered hedge fund investors, this isn't good enough. If anything, this means that they are likely to rush to redeem shares.

Indeed, that's what has happened with Blue Mountain. In fact, the fund has put a freeze on $3.1 billion of the Credit Alternatives' assets. Interestingly enough, the fund is offering investors a lower fee structure to retain them.

Why is this happening? Well, hedge fund investors – who include pensions, institutions, endowments and wealthy individuals – are trying to find ways to get cash. What's more, even those investors who don't need cash may decide to pull their money out anyway because of the fear that other redemptions will force Blue Mountain to dump its positions, trashing returns.

Basically, this is an old-fashioned "death spiral" and it is afflicting the massive hedge fund industry.

According to Reuters, hedge fund withdrawals amounted to $31 billion between July and September. That's about 11% of the total assets of the industry.

Unfortunately, the end of November is another window when hedge fund investors can elect to redeem shares. Thus, the unwinding may be still in the early stages, which is likely to put even more pressure on the markets.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.