Hedge fund reports conflict on industry’s fortunes

| 18/05/2011

(MarketWatch): Hedge-fund leverage is down, but equity managers have the highest stock-market exposure in four years, according to two industry reports released Tuesday. Average standard leverage decreased across all strategies from 1.27 to 1.10 times investment capital in the past year, according to Chicago-based Hedge Fund Research Inc. Meanwhile, average margin to equity declined to 16.98% from 17.13% year over year, HFR said. The percentage of funds that do not usually use leverage climbed to about one-third of the industry — an increase of 4% from last year, HFR also noted.

Leverage is the use of borrowed money to magnify investments. The strategy is an integral part of the way hedge funds are run, but too much leverage can increase losses and sometimes lead to fund blow-ups. Falling leverage suggests the $2 trillion hedge-fund industry is taking on less risk. However, another report Tuesday suggests the opposite.

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