Why is this so?

“Most fixed income arbitrage hedge funds have an equity market risk exposure because they are short Treasuries and long higher credit risk issues. When economies slow, credit spreads widen and the loss from the short Treasury position creates a net loss for a fixed income hedge fund, especially if the bond issuers on the long side experience financial difficulty.” if hedge funds make money by shorting treasuries and going long other bonds, wouldnt an increased spread make the strategy more profitable (buy low, sell high)?

Spreads widen that means if they long corporate bond the price went down and short the treasury which means the price went up. Although they might still have some carry. Think LTCM when all the spreads blew out (widen) and they tanked. FI arb HF usually make money when spreads tighten aka financial stability. For the past year and a half spreads widen and these funds got slammed.

if spreads widen (yields go up), bond prices go down…

so basically, FI arbitrage funds bank on narrow spreads on rates, which means more variablity in bond values which means treasury rates go down, which is why they short treasuries. if the economy slows, the spreads widen, which means corp bond values go down and treasurry values go up. since the strategy was the short treasuries and long bonds, the increase in value in treasuries leads to a loss…is that right?

yep, you got it. As the economy slows, the equity markets also decline, which is why these funds effectively have equity market exposure.