WEST PALM BEACH, FL (www.hedgeco.net)- The financing leverage levels applied by hedge funds continues to drop from the record levels of the pre -Long Term Capital Management days. According to areport by the Bank for International Settlements {BIS}, the levels of financing leverage of hedge fund managers dropped by one third in 2004. Hedge fund managers may borrow money outright throughleveraging or through derivatives, but high levels of leveraging however tends to magnify gains or losses according to the situation.
BIS also noted that since 1998, fewer players have participated in the process of offering brokerage services. Kostas Tsatsaronis, BIS’s head of the financial institutions division said, “Only the top-tier banks remained in the market�, he added, “A lot of second-tier players quit … Seeing it as too tricky, too expensive and too ugly for their risk committees.” Tsatsaronis however noted that such drop does not necessarily mean leverage levels are much lower than the 1998 levels because according to him there are many more hedge funds today as in 1998. Experts believe the total number of global hedge funds have surpassed 8,000.
US hedge fund industry regulators are worried that competition to gain hedge fund business may help to weaken the banks traditional lending standards. In 2004 leverage levels dropped to 3, meaning that hedge fund managers only borrowed on the average about 3 times their asset values.
During the Long Term Capital Management era in 1998, leverage levels were often as much as 10. Such problem also contributed to other factors leading to the collapse of LTCM.
BIS’s study also broke down the data into three categories of directional, equity-focused and market neutral hedge funds. The study also examined the leverage levels applied by fund of hedge funds. The fund of hedge fund category applied an average leverage of 2.5 in 2004 from a high around 11 in 1998 according to the new report. Hedge funds trading and focussing on equities had the highest indicated leverage according to the BIS study.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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