As of the end of 2010, hedge funds have increased leverage to within 10 percent of pre-credit levels, according to a report from UBS Prime Brokerage Services and have likely increased risk up even more to start this year, traders said.
Gross leverage for funds has climbed 43 percent from the bottom reached after the collapse of Lehman Brothers in 2008 and is up 13 percent in 2010, according to UBS. Risk-taking surged in the second half of the year as hedge funds scrambled to avoid the fate of another year of underperforming the S&P 500 and as the Federal Reserve signaled it was ready to flood the market with more liquidity through its second round of quantitative easing.
“My guess is that at this juncture we are close to peak leverage,” said Stephen Weiss, co-founder of Short Hills Capital who also worked for S.A.C. Capital at one time. “It’s a function of investors in hedge funds being more comfortable with risk at this juncture. This is evident in the ability of hedge funds to raise additional assets. Additionally, everyone wants to make more money and the quickest way to do that is through leverage.”Page 1 of 8 | Next Page