Hedge funds and leverage seem to have become synonymous in recent years.  Yet when we surveyed the recent history of hedge fund leverage last spring, we found that in aggregate, hedge funds were using only modest amounts of leverage after all.  In fact, data from the last few years seemed to indicate that aggregate hedge fund leverage reached a high of around 3x – a far cry from the “30x-40x” number quoted by some financial commentators.

One caveat to our scan of recent data was that many hedge funds use derivatives that are implicitly leveraged even if the hedge fund itself uses little or no leverage.  So aggregate hedge fund leverage could still have been many times higher than reported leverage.

The recent edition of a series of excellent McKinsey reports addresses this very question.  The report, titled “The New Power Brokers:  How Oil, Asia, Hedge Funds, and Private Equity are faring in the financial crisis” (free registration req’d.) contains the following chart showing the combined effect of fund-level leverage and securities-level leverage. More…