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2011 July 30 Saturday
Hedge Funds Not Heavily Leveraged?

Did the investment bankers blame the hedge funds in order to shift blame away from themselves? Investment banks are far more leveraged than hedge funds.

NEW YORK — July 27, 2011— The Journal of Financial Economics recently published a paper by Andrew Ang, Chair, Ann F. Kaplan Professor of Business and Chair, Finance and Economics Division at Columbia Business School; Sergiy Gorovyy, PhD candidate, Columbia Business School; and Gregory B. van Inwegen, Head of Quantitative Research/Managing Director for Tailored Portfolio Group of Citi Private Bank, that was the first paper to formally investigate hedge fund leverage using actual hedge fund ratios. Contrary to popular belief, the researchers found that hedge funds, in general, are only modestly leveraged. The average hedge fund leverages its equity by two times. In addition, hedge fund leverage is counter–cyclical to the leverage of the finance sector and large financial intermediaries. During the financial crisis, the leverage of investment banks spiked up to above 40 during the first quarter of 2009. During that time, the average hedge fund leverage was only 1.4, and hedge funds had started to substantially reduce their leverage in 2007 long before the onset of the financial crisis.

Perhaps the bad reputation of hedge funds was put on them as part of an inter-elite fight to shift blame for the financial crisis. Maybe the investment banks have more influence over the crucial TV channels which do so much to mold opinion (PDF format) and hedge fund operators just can't compete. Also, I expect the investment banks pay more for influence in Washington DC. How much of the wealth of the highly influential top 0.1% is invested in hedge funds? Enough for the hedge funds to have powerful protectors?

By Randall Parker    2011 July 30 04:27 PM Entry Permalink | Comments (4)
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