The risk of hedge funds crowding into the same equity positions and triggering a financial crisis is three times as great as in 2004, according to the Bundesbank.

The German central bank said the correlation between the investment returns of different long/short equity hedge funds grew from 0.13 in March 2004 to 0.36 at the end of October. Volker Zeller, an analyst who co-wrote the Financial Stability report in which the figures were published last week, said it was increasingly likely that hedge funds might rush for the exit at the same time and ignite an equities sell-off. "The degree of co-movement of these hedge funds might enhance the impact of developments and might contribute to a more severe market movement," he said. The correlation is the highest it has been, apart from in 1998 when US hedge fund Long Term Capital Management collapsed when the correlation spiked at 0.44. Assets in hedge funds have risen from $400bn (€300bn) in 1998 to $2 trillion, according to a survey of administrators published last week. Long/short equity is the largest hedge fund strategy. Other hedge fund strategies that invest in equities have also shown a greater correlation of returns since 2004. Event-driven funds, which invest in companies undergoing mergers or restructuring, have seen correlation rise from less than 0.2 to almost 0.3, while the correlation of funds investing in emerging markets has risen from just over 0.1 to almost 0.4, according to the Bundesbank.