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Bailey McCann, Opalesque New York: Hedge funds remain highly correlated to the S&P 500, according to a new report from Bank of America Merrill Lynch Global Research. Data shows that while correlation to the S&P 500 has dropped from historic highs of 97%, overall correlation remains elevated at 82%, suggesting that too many hedge funds are going after too few returns. The drop in correlation comes with a significant underperformance relative to the index, hedge funds are up 3.04% year to date as of September 26 2012, compared to 13.97% for the S&P 500.

The Market Neutral strategy has the highest correlation to the S&P - 91%, while Macro and Managed Futures have the lowest at 15% and -66%. Hedge funds have been showing elevated correlations to the index since 2010, with historic highs being reached in 2011, according to the report. The last high correlation macro cycle lasted six to eight years based on historic data. The 17-year historical average puts correlation at 30%, making the current 82% more notable especially given that it is a drop from last year, notes Mary Ann Bartels, lead hedge fund analyst at BAML.

Preliminary readings of the global diversified hedge fund index were up 0.51% in September, underperforming the S&P 500’s 2.42%. For individual strategies, Long/Short and Event Drive......................

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