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Money managers under the microscope

It’s not just the leverage

January 5, 2010

If private equity is anything to go by, there is plenty of hope for hedge funds operating in the new, post-Lehman world of lower leverage.

RTXQA97A study by the Center for Entrepreneurial and Financial Studies and Capital Dynamics, out today, finds that two-thirds of private equity’s value creation is down to improving companies it owns or rising market multiples.

Leverage, in contrast, accounts for just one-third.

Hedge funds used leverage extensively in the run-up to the credit crisis and whilst it has crept up from the very low levels seen this year, some executives say it will never again reach some of the very high levels we saw.

However, many managers say they don’t need such high levels of leverage anyway as investment opportunities are still so good, even after a bumper 2009 where returns were boosted by rising market multiples.

The CEFS/Capital Dynamics study doesn’t cover hedge funds, which obviously use a different business model to private equity. But it does suggest that alternative investment funds are not simply reliant on high levels of borrowing to generate a decent return.

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