54 Pages Posted: 2 Aug 2010 Last revised: 15 Jun 2011
Date Written: July 5, 2010
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.
Keywords: capital structure, long-short positions, exposure, hedging, systemic risk
JEL Classification: G11, G18, G23, G32
Suggested Citation: Suggested Citation
By Bing Liang