Crowded positioning in equity dispersion strategies could trigger significant hedge fund losses if correlations between individual stocks rise sharply, according to a report by Bloomberg.

Speaking at the Bloomberg Volatility Forum in New York, Bartlett warned that the growing popularity of dispersion trading among multistrategy hedge funds has created vulnerabilities that could emerge during a sudden market reversal. The strategy typically involves betting on relatively low volatility in broad equity indices while profiting from larger, divergent movements in their constituent stocks.

Dispersion strategies have attracted substantial interest from multistrategy portfolio managers in 2026 as correlations between individual equities have fallen to unusually low levels. This environment has allowed large movements in individual stocks to offset one another, suppressing index-level volatility and creating favourable conditions for the trade.

However, Bartlett warned that a sharp increase in correlations could trigger substantial losses, particularly among managers with limited experience of previous market disruptions. He drew comparisons with 2011, when crowded dispersion positions suffered significant reversals during the European sovereign debt crisis.

The risks have also attracted attention from Adapt Investment Managers, which examined how crowded positions across multistrategy trading teams could amplify market volatility. Its research outlined a scenario in which the forced liquidation of a smaller portfolio triggers cascading losses and further unwinding among larger managers holding similar trades.

Although equity correlations have increased from their mid-year lows, they remain well below historical averages. Bartlett warned that a meaningful reversal could expose leveraged hedge funds to significant losses, highlighting the risks posed by crowded derivatives strategies during periods of market stress.