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Average standard leverage decreased across all hedge fund strategies from 1.27 to 1.10 times investment capital, while average margin to equity also declined, falling from 17.13 to 16.98 percent, year over year. The percentage of funds which do not typically utilize leverage rose to approximately one third of all funds, an increase of four percent over last year, while over half of all funds utilize leverage of between one and two times their investment capital.

Larger hedge funds characteristically employ a higher level of leverage: 23 percent of funds with greater than $1 billion in assets under management (AUM) utilize leverage of between two and five times investment capital. Although funds which employ leverage typically experience greater volatility, the performance difference between leveraged and non-leveraged funds since 2005 is not statistically significant.

Hedge Funds Outperform Inflation Benchmarks
Hedge funds offer investors attractive inflation-protected performance, with the HFRI Fund Weighted Composite outperforming benchmarks of inflation since 1990. In addition, hedge fund strategy leadership has varied across time periods of accelerating inflation, with Emerging Markets and Equity Hedge funds characteristically providing the greatest inflation protection. Since 1990, hedge fund performance has been more highly correlated to changes in U.S. inflation than either gold or equities, and has had approximately the same correlation to inflation as commodities.

“The hedge fund industry reached a new record level of capital in 1Q11 by offering investors performance driven by prudent use of leverage, transparency and inflation protection over the long term,” said Kenneth Heinz, President of HFR. “The industry has evolved to suit the requirements of sophisticated investors as an integral component of their portfolio allocations as they position for growth and global inflation in 2011 and years to come.”

The full industry report can be downloaded from Opalesque: Source

(press release)

About HFR
Hedge Fund Research, Inc. (HFR) is the global leader in the alternative investment industry. Established in 1992, HFR specializes in the areas of indexation and analysis of hedge funds. HFR Database, the most comprehensive resource available for hedge fund investors, includes fund-level detail on historical performance and assets, as well as firm characteristics on both the broadest and most influential hedge fund managers.

HFR has developed the industry’s most detailed fund classification system, enabling granular and specific queries for relative performance measurement, peer group analysis and benchmarking. HFR produces over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus. With performance dating back to 1990, the HFRI Fund Weighted Composite Index is the industry’s most widely used standard benchmark of hedge fund performance globally. The HFR suite of Analysis Products leverages the HFR Database to provide detailed, current, comprehensive and relevant aggregate reference points on all facets of the hedge fund industry. HFR also offers consulting services for clients seeking customized top-level or more nuanced analysis. For the hedge fund industry’s leading investors and hedge fund managers, HFR is The Institutional Standard. Corporate website: www.hedgefundresearch.com

- FG