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Alternative Market Briefing

Reports say hedge fund leverage on both the rise and on the decline

Thursday, May 19, 2011

From Kirsten Bischoff, Opalesque New York:

Hedge Fund Research, Inc., reported on Tuesday that leverage across all hedge fund strategies has decreased from 1.27 to 1.10 times investment capital. The environment is also slowly becoming more favorable for managers, with hedge funds’ margin to equity also declining slightly, falling from 17.13% to 16.98% year-over-year. Additionally, HFR found that the percentage of funds not using leverage rose to represent one third of all hedge funds (4% higher than in 2010). Meanwhile, over half of all funds are using leverage of between one to two times their investment capital.

Tracking leverage use in the hedge fund industry is difficult. The HFR report has raised some questions because, as recently as February, Bank of America Merrill Lynch measured hedge fund leverage as incrementally increasing on a month-to-month basis, with February 2011 hedge fund leverage hitting 32.7% gains over February 2010. The investment bank stated that although leverage was on the rise, reaching an estimated $310bn, it was still below the highs of July 2007 ($381bn). Another, more recent MLBofA report says that as of May, "Hedge funds are risk-on with 1.53x gearing the highest since Nov-07" (......................

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