Funds Return to Leverage

Hedge Funds Slowly Returning to Leverage after Crisis

Hedge funds and private equity are slowly returning to leverage, according to fund execs at a recent summit. During the credit crisis, alternative funds cut their borrowing almost entirely but as credit has freed up funds are slowly implementing leverage in their strategies and deals again. The low level of borrowing means less market volatility as hedge funds and private equity funds do not have to worry over banks' margin calls which impact their decisions and trades. The London Interbank Offered Rate for leverage has gone down to a more reasonable rate following the crisis and banks are more willing to lend, spurring more interest in borrowing but it will still be some time before funds are comfortable enough to borrow at pre-crisis levels again.

While banks are more prepared to lend than last year, lending levels are far lower than in the heady days before the Lehman collapse, fund executives told the Reuters Private Equity and Hedge Funds Summit in London.

Funds too are limiting borrowing to manageable levels.

"Levels of leverage have fallen dramatically on all our strategies, for example our convertible strategies are running with no leverage," said Chris Goekjian, chief investment officer of private equity firm Cheyne Capital.

"Even if you want leverage now, your prime broker won't (always) give it to you," said Goekjian, whose company is looking to launch an EU-regulated fund to invest in merger arbitrage.

"Leverage has returned and it is well priced, diversified and well risk-managed," said Oliver Dobbs, chief investment officer of $6.7 billion hedge fund company CQS. Source

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