More evidence that the amount of juice used by hedge funds was never as great as many assumed
Jul 16th, 2009 | Filed under: Hedge Fund Industry Trends, Today's Post
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…
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How does one factor in the billions of dollars lost to fraudulent hedge funds, and how is that reflected in the charts?
[...] How the hedge fund boom and bust paralleled that of the dot-com bust. (All About Alpha) [...]
two comments:
1. The McKinsey numbers pale by comparison with the other alpha-seekers of our world, the banks’ prop desks. Total unlevered assets, if you can estimate them, for i-banks, would have been 2-3 times that of the h-fund industry. And leverage was stratospheric – I remember GS in November 2008 underling their prudence in reducing their leverage to only 16x. Sixteen Times. I’d take a wild guess that, if you factor this into McK’s numbers, you’d get a range from more like US$20tn to US$3tn (note – “guess” – don’t quote me!). The reduction in the firepower of the h-fund industry is tiny compared with that of the i-banks…
2. …so the amount of alpha-seeking capital has imploded, maybe down by 90% in some markets/sectors, and hence returns on capital currently invested should be much higher than the period 2003-2007 – so those managers below high water mark may recover it more quickly than McK estimate. I suspect relatively few managers will close because they’re too far below HWM (as they still retain the long-term optionality of their revenue stream) tho’ we are seeing and will continue to see managers close because the size of their assets is not longer viable.