Hedge fund leverage

We investigate the leverage of hedge funds in the time series and cross-section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.

► Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries. ► Changes in hedge fund leverage are more predictable by macro than by fund-specific factors. ► Increases in funding costs forecast decreases in hedge fund leverage. ► Increases in market returns forecast increases in hedge fund leverage. ► Increases in fund return volatilities predict future decreases in leverage.