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From Kirsten Bischoff, Opalesque New York:

Hedge funds are becoming more correlated to equities markets, said a market analysis report from Bank of America Merrill Lynch yesterday. Besides Dedicated Short Bias, all other strategies have been positively correlated to S&P500 returns for the last twelve months.

BofA/ML alerted hedge fund investors that the firm “continues to favor hedge funds as a diversification strategy, but the increased correlations stress the importance of seeking out funds that have more of a diversification benefit.”

As US equities enjoy numerous rallies, hedge funds moving to capture upside will move to become beta capturers. Investors will likely see greater beta in their hedge fund portfolios if annualized US stock market returns reach the 8% currently being predicted by BlackRock’s Vice Chairman Robert Doll (see below).

BofA/ML reported long/short funds had increased their net long exposure to 26% (which is still more pessimistic than their historical range of 35%-40%).

As for leverage, it was lower in June but still elevated. NYSE margin debt has decreased as investors have become less confident in the US equity market. On a month to month basis, June levels were down 2.2% after being down 9.8% in May.

Bank of America Merrill Lynch’s 24-page report “July turning out to be a better month for HF returns” can be accessed here: ......................

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