Hedge Funds Leverage

Hedge Funds Leverage

Hedge Funds Increase Leverage to Highest Level Since '04

Hedge funds continue to boost leverage, showing renewed confidence in the markets with hedge fund borrowing rising to the highest level since 2004.  Market observors view this data as a suggestion of greater risk tolerance and confidence in the economy and financial markets, a welcome sign after months of unrest and volatility in the markets.

The rising use of borrowed money shows that everyone from the biggest firms to individuals is willing to take more risks after missing the rewards of the bull market that began in 2009. While leverage means bigger losses should stocks decline, investors are betting that record earnings and valuations 9.8 percent below the six-decade average will help push the Standard & Poor’s 500 Index toward the record it set in October 2007. 
“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, said in a Jan. 8 telephone interview. “Leverage increasing in the hedge-fund area suggests they’re now getting on board.” 
The S&P 500 rose 0.4 percent to 1,472.05 last week on better-than-projected reports from Alcoa Inc. to Mosaic Co. (MOS) The index is about 6 percent away from the all-time high reached in October 2007 and has already gained 3.2 percent in 2013, led by Celgene (CELG) Corp. It fell less than 0.1 percent to 1,471.55 at 9:37 a.m. New York time today.
Gross leverage, a measure of hedge fund borrowing that shows how much their holdings exceed the cash invested by clients, was 153 percent in the week ended Jan. 4, up from an average of 152 percent in 2012 and 143 percent a year ago, according to data from New York-based Morgan Stanley. The level has averaged 143 percent since 2005, the data show.  Source

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