Wednesday, April 7, 2010

It is a danger signal that one should not ignore.

In a recent hedge fund industry report published by Citibank, it is suggested that Convertible Arbitrage managers now use 4 times leverage on average (see chart 5). Other strategies show a similar pattern. Fixed Income Arbitrage, Equity Market Neutral, Event Driven, Global Macro and Multi- Strategy all use considerably more leverage than at this time last year. Most of them are also struggling to deliver returns anywhere near the levels of 2009. The implication is obvious. When managers resort to increased use of leverage it is an implicit admission that underlying returns are not high to generate attractive returns. It is a danger signal that one should not ignore.

Source
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H/T Joe.