It looks like the economic slowdown that has chopped (or eliminated) returns in many asset classes is set to hit another sector, and a rarefied one at that: the hedge fund sector.

Hedge funds may post their worst monthly performance result in five years in July, after trade calculations on financial stocks and crude oil backfired, according to data provided by Hedge Fund Research Inc., Bloomberg News reported Monday.

Hedge Fund Research Inc.'s Global Hedge Fund Index was down 3.16% in July as of July 24 -- on pace to record its largest monthly decline since 2003. The index is also down 4.16% for the year.

Banks are demanding more capital from hedge funds to support outstanding loans resulting in the dissolution of some funds forced to liquidate assets, Bloomberg News reported Monday.

``If you have leverage, you're stuffed,'' Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients, told Bloomberg News. Allen said the crisis is like a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back. He added there are likely to be more collateral /margin-related liquidations of hedge funds in the weeks ahead.

The $2 trillion hedge fund industry is in the throes of its worst capital crunch since the Federal Reserve successfully encouraged the securities industry to provide $3.6 billion to bail-out Long Term Capital Management L.P. in 1998. Amplified by leverage and aided by innovative investment formulas, many hedge funds generated outstanding returns for much of this decade, often aided by high-performing asset-backed securities. However, as the housing market slowed and mortgage-backed securities began to fail, hedge funds started to experience the down side of their deployed leverage: banks and other counterparties who lent money for these investments had the right to and initiated requests that hedge funds put up more capital. Hedge funds that could not meet the capital requirement have been liquidated.