* Leverage up 3.2 pct in August from July, up 5.4 pct
* Levels still lag 2012, 2011 and pre-crisis peaks
By Katya Wachtel
NEW YORK, Oct 8 U.S. hedge funds and other
clients of Wall Street investment firms raised their level of
borrowed money in August, a sign they may be more confident in
the markets, data published Monday showed.
Leverage rose to $286.6 billion last month, according to New
York Stock Exchange margin debt data, up 5.4 percent since
August last year. It is the first time in nine months that
margin debt has increased on a year-over-year basis, analysts at
Bank of America Merrill Lynch showed in their Hedge Fund
Leverage levels "can be used as a sentiment indicator" so
the increase could mean investors have regained some confidence
in the market, the report said.
While the level of leverage recorded in August is a 3.2
percent rise on July levels, it still lags the amount of
borrowed cash that investors were using to make bets in the
stock market before Lehman Brothers collapsed, according to NYSE
Hedge funds have gained about 5 percent this year through
September, according to hedge fund tracking firms, but still
trail the broader stock market. The S&P 500 index rose more than
16 percent through September.
August's rise in leverage could be an indication that hedge
funds and large investors, reassured by rallying stock markets,
are willing to use more borrowed money try and amplify their
returns, though another month of data would be needed to confirm
this, Bank of America analyst Mary Ann Bartels said in an email.
Before the financial crisis, hedge funds, particularly those
focused on bets in credit markets, used leverage in different
forms boost returns, such as increasing exposure to inherently
levered products like derivatives, or by using margin or
borrowed money from Wall Street.
In 2007, NYSE margin debt rose above $317 billion and stayed
there for the remainder of the year, hitting a peak of more than
$381 billion that July.
Investors reduced their leverage in 2009 and 2010 to levels
as low as $173 billion and then began to borrow more money again
through July of 2011. Spooked by whipsawing markets last summer,
which devastated the portfolios of some of the country's
savviest investors, money managers took off leverage again in
the second half of the year.
Through August, NYSE margin debt is down about 4 percent
from its 2012 peak of $298.5 billion, recorded in April.
Beginning in May risk-averse investors reduced leverage, pulling
back from global financial markets riled by fears that Greece
would exit the deeply troubled euro zone.
Margin debt remains down roughly 10.6 percent from its
post-2008 peak of $320.7 billion, which it reached in April last
NYSE member organizations are required to report monthly the
total amount of money borrowed by customers to purchase
While hedge funds have yet to ratchet up to pre-crisis
levels, or even to the highs of 2011, Bank of America analysts
said the fact that investors increased leverage last month is a
Margin debt is one way to measure how much risk hedge funds
and other large investors are taking by using borrowed cash, but
it fails to address or measure the exposure those firms have to
'embedded' or 'hidden' leverage, which they can obtain by
investing in structured products like collateralized loan
obligations or asset-backed-securities, which are more highly
levered in themselves. Some hedge funds have been eyeing those
riskier, more exotic assets in their hunt for yield.
Data published Friday by BarclayHedge and TrimTabs showed
that hedge fund managers "are strongly inclined to maintain
current levels of leverage," and "plans to lever up fell
slightly in September while plans to reduce leverage climbed by
a small margin."