Hedge Fund Leverage Reaches 2004 Levels

Holdings exceed cash invested by 153%, according to Morgan Stanley data

All hail the return of easy money.

While many banks are trumpeting the fact that they’re “only” leveraged by a ratio of 14:1, hedge funds have reached leverage levels not seen since 2004.

Evidence for some of a further sign of economic recovery and confidence as a result of the deal reached by Congress and the president to avert a fiscal cliff, Bloomberg notes more leverage means more potential losses should stocks decline, a major contributor to the depth and length of the economic crisis beginning in 2008.

Despite the risk, “investors are betting that record earnings and valuations 9.8% below the six-decade average will help push the Standard & Poor’s 500 Index toward the record it set in October 2007,” the news service reports.

“The first step of increasing risk is just going long, the second part of that is levering up in order to go longer,” James Dunigan, who helps oversee $112 billion as chief investment officer in Philadelphia for PNC Wealth Management, told Bloomberg. “Leverage increasing in the hedge-fund area suggests they’re now getting on board.”

Gross leverage, a measure of hedge fund borrowing that shows how much their holdings exceed the cash invested by clients, was an astounding 153% in the week ended Jan. 4, up from an average of 152% in 2012 and 143% a year ago, Bloomberg added, citing data from New York-based Morgan Stanley. The level has averaged 143% since 2005, the data show.

The hedge fund industry will set a record for assets this year despite the sector’s lackluster investment performance over the past two years, according to predictions by Agecroft Partners, a global consulting and third-party marketing firm for hedge funds.

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Read Eight Hedge Fund Trends in 2013 on AdvisorOne.

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