* NYSE stock positions using leverage hit record high
* Level of leverage seen as 'very dangerous'
* Last peak in leverage was followed by long bear market
* Stocks to suffer two big pull-backs in 2014 -BNP's Fowler
By Tricia Wright and Blaise Robinson
LONDON/PARIS, April 4 (Reuters) - Hedge funds are borrowing record amounts of money to fund bets that stock markets will continue rising, creating conditions that could accelerate price falls if those leveraged positions are hurriedly closed.
Although global equities look set to advance for the remainder of the year, nervousness about the strength of China's economy and the U.S. Federal Reserve's plans to scale back its stimulus programme could mean a rocky ride for markets.
With equity leverage levels sitting at all-time highs, a mild retreat in stocks could morph into a sharp correction as investors faced with paying back the debt on top of taking a loss tend to sell out quickly when shares start to dip.
Data from the New York Stock Exchange shows margin debt - equities bought with borrowed money - on the NYSE market totalled around $465 billion at the end of February, its highest level ever. Such investments have been fuelled by cheap money as the Fed has kept interest rates ultra-low and injected huge amounts of liquidity into the economy to support growth.
Data from Eurekahedge, which monitors the global hedge fund industry, paints a similar picture, with figures showing the weighted average ratio of hedge funds' gross assets to capital hitting 1.70, above the previous peak of 1.68 reached in 2007.
The vast majority of positions are 'long', betting on a stock market rise. According to data from Markit, 'long' positions currently outnumber 'shorts' by 12.3 times globally - down from a peak of 14.2 hit earlier this year, but still very high historically.
The elevated level of leverage is not a trigger for a correction in itself, but once the market starts to retreat, a potential rush by hedge funds to cut positions would strongly amplify the sell-off.
"There are caveats, but the truth is: it's high and it is very dangerous," said Andy Ash, director at Monument Securities.
"People don't want to have to go to their own investors and say, 'Look, I have this very large geared book with exactly the same positions I've had for the last six months and it doesn't appear to be working'."
Since the Fed is now tightening monetary policy, the conditions for leveraged bets are not so favourable. At the same time, hedge funds could rethink their bullish positions as the stock market rally loses steam.
When NYSE margin debt last peaked, at $381 billion in July 2007, the market suffered a quick 12 percent correction before slipping into a long bear market which lost stock indexes about 60 percent of their value between late 2007 and early 2009.
The MSCI World Index, which tracks stocks from developed economies, has surged 20 percent in the past nine months, but has been moving sideways since early March, prompting a number of investors to start cashing in gains.
The index has not experienced a correction of more than 10 percent since the second quarter of 2012, while its price-to-earnings valuation ratio has hit 14.9 - a level not seen since 2007 and well above the 10-year average of 13.4, according to Thomson Reuters Datastream.
"There is a risk that this leverage might need to be flushed out if we get a bit of a pull-back," said Gerry Fowler, global head of equity and derivatives strategy at BNP Paribas.
"While we're still bullish on equities, the pull-backs are going to be slightly more significant than they have been for the last couple of years. Rather than being 5 percent pull-backs, they'll be 10 percent," he added, saying there is scope for two such market corrections this year.
And with investors' mood recently souring, hedge funds might be tempted to move to the sidelines.
According to Bank of America-Merrill Lynch's fund manager survey for March, global investors are moving toward a 'risk off' stance as the prospect of geopolitical instability grows.
"The proportion of asset allocators 'overweight' equities has dropped by 9 percentage points month-on-month to a net 36 percent. Demand for protection against sharp falls in equity markets has increased to its highest level in 22 months," BofA Merrill Lynch analysts wrote in a note. (Editing by Francesco Canepa and Catherine Evans)