Hedge Fund Leverage

Abstract:     
We investigate the leverage of hedge funds using both time-series and cross-sectional analysis. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values forecast increases in hedge fund leverage. Decreases in fund return volatilities also increase leverage.

Number of Pages in PDF File: 54

Keywords: capital structure, long-short positions, exposure, hedging, systemic risk

JEL Classification: G11, G18, G23, G32

working papers series