Hedge fund market correlation drops, Merrill says

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The correlation of hedge funds to the Standard & Poor's 500 Index has decreased significantly since last summer, according to the February 5 edition of Merrill Lynch's weekly Hedge Fund Monitor.

In the fall of 2005, diversified hedge funds showed a rolling one-year correlation of 85% to the S&P 500, according to the report. That puts them in lockstep with actively managed mutual funds, which have historically averaged a similar correlation. Hedge fund correlation declined to nearly 80% in the second quarter of 2006 and now stands near 70%, Merrill says.

With institutions applying ever greater rigor to their