11/08/2010

Levels of leverage

Leverage; so long the shibboleth that has been used to brand hedge funds, dropped out of sight in 2008. Since this nadir, hedge fund borrowing has slowly been creeping back as managers and investors take on more risk and look to benefit from ratcheting up the value of funds. May and June temporarily halted this return. Market fluctuations led to a process of de-risking, particularly among relative value and multi-strategy funds (see news analysis, p15). Yet, average leverage is still expected to hover around the 3x mark by year-end. Despite this return, it’s also very clear that rates of gearing will not hit the unmanageable pre-crisis highs. Credit Suisse’s latest figures show how modest the return to leverage has actually been, with managers, investors and hawkish regulators all monitoring levels for signs of hubris and over-exposure.