Hedge funds had an atrocious first quarter, and investors responded by yanking their money out in large sums, but the damage isn’t done. Last night American International Group said last night with its earnings report that it is in the process of redeeming $4.1 billion in investments from the funds it had invested in.

A wave of anti-hedge fund sentiment

Billionaires Warren Buffett and Steve Cohen have also been critical of hedge funds within the last week, and Christopher Ailman, chief investment officer for the massive pension fund CalSTRS, predicts that the traditional “2 and 20” hedge fund business model is dying off quickly.

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Zero Hedge has been blasting central banks for years and reiterated its finger-pointing stance against policymakers, who the website calls "marketwide Chief Risk Officers, who intervene every time there is even a 5% drop, and have made risk hedging moot." The website also said that hedge funds have been dying "ever since central banks decided to go activist on the stock market" and noted that Ailman's remarks are a signal that hedge funds are only beginning to see problems.

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Are hedge funds worth their high fees?

Speaking from the Milken Institute Global Conference, Ailman told CNBC's Squawk on the Street that CalSTRS isn't paying the enormous fees funds have historically charged, although they do continue to invest in select hedge funds in search of yield during this time of low interest rates. He added that the "two and 20" model, which involves a 2% fee on total asset value and 20% of returns, is dead and broken.

The California pension fund isn't the only major pension fund to decide that hedge funds just aren't worth the high fees they charge. Last month the New York City Employees Retirement System voted to exit major fund firms, demanding that hedge fund executives "sell their summer homes and jets, and return those fees to their investors" reported Reuters.

Other investor classes are also pulling their assets out of hedge funds as the industry racked up over $15 billion in outflows during the first quarter, and the Financial Times said in April that it was portfolio managers' worst quarter in seven years. However, not all investors are able to negotiate fees. CalSTRS through its massive heft into the negotiations as Ailman said they've "put on their boxing gloves and gone in there and just laid it out."

AIG blames hedge funds for losses

AIG missed profit expectations in the first quarter, making it the third quarter in a row that it missed. The insurer blamed poor hedge fund returns as they weighed on its investment income. It has received $1.2 billion of the $4.1 billion in redemptions it is seeking back so far and said it will continue pulling back from hedge funds as lock-ups end and take that cash and put it into property and bonds.

AIG Chief Executive Peter Hancock told Bloomberg that the redemptions will help free up capital so they can deploy it in their core underwriting business.

Buffett, Cohen come down hard on hedge funds

Warren Buffet and Steve Cohen both offered reasons they believe hedge funds have struggled so far this year.  Steve Cohen blames a lack of talent. Speaking from the Milken Institute Global Conference, he called talent "really thin" right now. He also said there are just too many portfolio managers following similar strategies.

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Buffett said over the weekend at his firm's annual meeting that large investors should indeed be frustrated about the high fees charged by hedge funds that don't match index funds' returns.

Also activist fund manager Dan Loeb predicted last week that this year's "catastrophic" performance has put funds in the beginning phases of a "washout" according to Third Point's Q1 letter.