Hedge funds scooped up shares of credit-card companies like big spenders on a shopping spree, making Visa Inc. and MasterCard Inc. among the most popular hedge-fund trades.

The bets paid off for a while. But when bad news hit in May, many funds—including 10 hedge funds run by investors connected to the well-known Tiger Management LLC—rushed for the exits, together. Shares plunged.

Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices.

The pack behavior undermines the image of hedge-fund chiefs as savvy money managers who sniff out investment opportunities that others don't see—thereby justifying the hefty fees they charge clients. It also suggests that hedge funds are having a harder time coming up with money-making ideas in rocky markets.

During the bull market, hedge funds regularly generated strong returns as broad stock-market indexes marched higher. But since the start of 2009, the average performance of hedge funds has trailed the return of the Standard & Poor's 500 Index in six out of eight quarters, according to Hedge Fund Research Inc. For 2010, hedge funds were up 10.4% on average, compared with a 15% gain for the Standard & Poor's 500 stock index, including dividends reinvested, according to the hedge-fund research firm.