Standard & Poor’s Fund Services is warning investors in funds of hedge funds that they may get burned by too high a correlation with equity markets. “Investors may need to think carefully about market conditions despite hedge funds’ general aim for absolute returns,” S&P analyst Randal Goldsmith said in a statement. “In addition to remaining alert as to what might cause a market correction, it may also be important to take a look at whether funds are showing more correlation over time and whether their portfolios are taking more exposure to equity long-short and macro compared with arbitrage and fixed-income related strategies.” Cause for concern, according to S&P, rose from the fact that a number of FoHFs drooped more than their related equity indices, brought on by too much exposure to small- and mid-cap stocks, commodities and emerging markets. “Investors might have been upset by the returns provided by many funds of hedge funds claiming to be independent of market direction,” Goldsmith said. S&P noted that those FoHFs that performed best last quarter were those focusing on arbitrage, trading and fixed-income related strategies.