(May 7, 2013) — Leverage in hedge fund portfolios has hit levels only seen in 2007 – the boom before the bust – the latest weekly report on the sector from Bank of America Merrill Lynch has revealed.
Across the sector, leverage, as measured by NYSE Margin Debt, hit $380 billion last week, the bank said, just $1 billion lower than the high point of 2007. The level is some 28% higher than at this time last year and 3.66% month-on-month. Additionally, cash balances in margin accounts went down to a negative $92.2 million in March – the lowest since 2000, the bank said.
Some of the largest movers were market neutral funds, which increased exposure from 7% to 10%, while equity long/short funds moved slightly up from 40% to 41%.
“Current levels of both net free credits and margin debt indicate extremely bullish sentiment in the equity market,” analysts at the bank said.
In January, aiCIO reported hedge fund leverage had hit a 52-week high following a report by the prime brokerage unit of JP Morgan. This spike came in tandem with an uptick in performance.
Last month, derivatives brokers told the US Federal Reserve that their hedge fund clients were displaying a greater desire for risk and leverage.
Half of all respondents to a poll by the Fed reported that of their closest managers, risk pursuit had “increased somewhat” over the first quarter of the year. The remainder had stayed consistent, except for 4.5% which had “decreased somewhat,” the report said.
In a low interest rate/yield environment, investors have been seeking new ways to bring in returns.
Leverage has been generally increasing after a mass sell-off following the crash after the collapse of Lehman Brothers, and if recent upticks continue, could breach pre-crisis records.
Related content: The New Alternatives.