Hedge funds tracked global equity markets more closely in 2025 than at any point in at least five years, prompting concerns among allocators over the industry’s ability to provide protection during a market downturn, according to a report by Bloomberg citing research from BNP Paribas.

The data shows that the correlation between hedge fund returns and the MSCI World Index reached its highest level since at least 2019, following a prolonged global equity rally that has lifted asset prices for three consecutive years.

The findings come after hedge funds delivered an average return of 12.5% in 2025 — their strongest annual performance since 2009, according to HFR — helped largely by rising equity markets. However, the increased correlation has renewed debate over whether hedge funds are delivering sufficient diversification at a time when valuations, particularly in parts of the technology and artificial intelligence sectors, are under scrutiny.

Equity long-short strategies recorded a correlation of 0.98 with equity benchmarks last year, compared with a three-year average of 0.92 and a five-year average of 0.86, BNP Paribas said. At an industry-wide level, hedge funds showed a correlation of 0.92 with the MSCI World, versus a five-year average of 0.76.

Market participants warned that elevated correlations could amplify losses if markets reverse sharply. Previous periods of heightened correlation — including during 2011’s eurozone debt crisis and the 2022 market sell-off — coincided with weaker downside protection from hedge fund portfolios.

Despite the trend, some strategies continued to offer diversification benefits. Discretionary macro funds showed a comparatively low correlation of around 0.3, reflecting their reliance on macroeconomic themes rather than equity directionality.

BNP Paribas said the data was drawn from a survey of 246 hedge fund investors conducted in December and January, representing approximately $1.1tn in assets under management or advisory mandates.

While rising correlations have raised concerns among allocators, the bank noted that many equity-focused hedge funds have continued to manage return volatility effectively, even as exposure to equity market movements has increased.