• Sprott Money
    05/06/2016 - 06:03
    The US, in its own decline, is showing this same self-destructive tendency. The worse things get, the greater the inclination of the citizenry to say, “Carry on, everything’s fine.”

Hedge Funds Most Levered And Long Since 2004

Tyler Durden's picture


In the last days of 2012 we penned an article describing the current situation of the market as follows: "Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol." Today, Bloomberg catches up with this rather critical topic, and confirms that the buying power of the biggest marginal traders left in the market who do not recycled deposits into stocks - hedge funds - is nothing more than debt piled upon debt, as "Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley." BBG also recaps what our readers already know: "Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show." In other words: everyone is all in and levered. And soon, in about two weeks, Bloomberg will figure out that everyone, or at least a central bank here or there, is, indeed, "selling vol."

From Bloomberg:

Gross leverage, a measure of hedge fund borrowing that shows how much their holdings exceed the cash invested by clients, was 153 percent in the week ended Jan. 4, up from an average of 152 percent in 2012 and 143 percent a year ago, according to data from New York-based Morgan Stanley. The level has averaged 143 percent since 2005, the data show.


Managers are borrowing more amid a 15 percent rally in the S&P 500 since June, a gain that was mostly missed by professional investors who speculated shares would fall, according to data from Hedge Fund Research Inc. and International Strategy & Investment Group.


Borrowing increased as President Barack Obama and Republican lawmakers reached an agreement averting more than $600 billion in automatic tax increases and spending cuts.

Sadly, Bloomberg's conclusion is off:

The rising use of borrowed money shows that everyone from the biggest firms to individuals is willing to take more risks after missing the rewards of the bull market that began in 2009. While leverage means bigger losses should stocks decline, investors are betting that record earnings and valuations 9.8 percent below the six-decade average will help push the Standard & Poor’s 500 Index toward the record it set in October 2007.


“The first step of increasing risk is just going long, the second part of that is levering up in order to go longer,” James Dunigan, who helps oversee $112 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a Jan. 8 telephone interview. “Leverage increasing in the hedge-fund area suggests they’re now getting on board.”

Actually no.

What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection - sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don't lead to soaring stock prices. 

It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds - over 230 - than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL "investors", sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.

Is this sustainable? Find out soon, perhaps in as soon as one month, when it will finally be up to the flailing market, not some trillion dollar nonsense, to get Congress to a debt-ceiling compromise (because it is not different this time). It is at that point that we will find out just how much the surge in leverage is due to optimism, and how much due to being held hostage by a market in which to keep up with the beta rally one has no choice but to layer debt upon debt upon debt to pretend alpha still works in the New Normal.

Or else: "career risk."

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Mon, 01/14/2013 - 12:08 | 3150693 Zer0head
Zer0head's picture

I wish I had been levered and long in 2004

Mon, 01/14/2013 - 12:27 | 3150760 slaughterer
slaughterer's picture

It is a losing game to heroically short indices when the Fed is pumping this much liquidity into the HFT Battle Royale.

This is what these hedge funds realize: No way there can be a downtick, because then these funds would all quickly get margin calls.

Mon, 01/14/2013 - 12:32 | 3150775 Cognitive Dissonance
Cognitive Dissonance's picture

The grizzled old cowboy is fully aware that he doesn't really control the herd of cattle. The herd just let's him think he does by cooperating most of the time.........until it doesn't.

Mon, 01/14/2013 - 12:41 | 3150832 forwardho
forwardho's picture


All must stand together, or all will burn.

What price is to great to pay, if it preserves the illusion?

Trapped in the device which they built in utter hubris.

Mon, 01/14/2013 - 13:46 | 3151152 LawsofPhysics
LawsofPhysics's picture

What about bonds coming due and future bond auctions?  Most sheep and their 401's are in sovereign debt (because it is "safe).  So you are saying that the world will allow the Fed to be the only buyer of sovereign debt in the western world?  Why do I feel that the death of western currency and WWIII is more likely?

Mon, 01/14/2013 - 13:14 | 3151003 ArkansasAngie
ArkansasAngie's picture

Somebody ... Everybody ... Well hedgies anyway ... Have been buying the f'ing dip
Ooops ... You say there hasn't been a dip?
No worries Uncle Bennie has everything under control

Fry shatheads

Mon, 01/14/2013 - 12:08 | 3150694 kliguy38
kliguy38's picture

Is there still time for me to get in......

Mon, 01/14/2013 - 12:11 | 3150701 Stackers
Stackers's picture

$25k at Chuck Schwabb and you're good to go. HFT's always looking for a new "trading partner". Just make sure you have lots of money to keep feeding the acocunt with.

Mon, 01/14/2013 - 12:14 | 3150708 Rainman
Rainman's picture

By the time you read about it, it's too late < general investing rule of thumb >

Mon, 01/14/2013 - 16:34 | 3151934 mkhs
mkhs's picture

There is this bridge in Brooklyn I can let you have, cheap.

Mon, 01/14/2013 - 12:10 | 3150703 AccreditedEYE
AccreditedEYE's picture

Man, what a surprise.... the dip was bought.

Mon, 01/14/2013 - 22:46 | 3152971 balolalo
balolalo's picture

Dead cat bounce

Mon, 01/14/2013 - 12:12 | 3150706 Dr. Engali
Dr. Engali's picture

Bloomberg can't be that stupid, unless they are just trying to suck retail in. Anybody with even a little bit of experience know that when they are levered up and all in that disaster is close. There is know retail coming into the market to rescue them.

Mon, 01/14/2013 - 12:18 | 3150728 SmoothCoolSmoke
SmoothCoolSmoke's picture

"disaster is close" Doc, that logic has been a loser for 3+ years.  Believe me, I know.

Mon, 01/14/2013 - 13:45 | 3151148 yogibear
yogibear's picture

The game has been to suck in the retail investor. The retail investor is the last to go in. You'll know it's a top once their all in.  Professionals then exit and leave the retail holding the bag. 

Mon, 01/14/2013 - 12:12 | 3150709 Racer
Racer's picture

But couldn't the leverage be on shorts as well as longs?

Mon, 01/14/2013 - 12:14 | 3150717 optimator
optimator's picture

HFT - ETF + Insider Trading (try competing with that).

Mon, 01/14/2013 - 12:17 | 3150726 Peter Pan
Peter Pan's picture

So what they are telling us is that everyone is speculating and very few are actually investing in stocks. Is that right?

A bit like marriage being replaced by one night stands.

Mon, 01/14/2013 - 12:18 | 3150734 caimen garou
caimen garou's picture

everybody is getting on board? on what,the titanic? the unsinkable,ha!

Mon, 01/14/2013 - 12:47 | 3150859 Village Smithy
Village Smithy's picture

Yes, they are all fearlessly jumping aboard because they all believe themselves to be ever so agile and quick. They think they will have first class access to the lifeboats. We shall see. There is almost nobody in this for the long haul, when the light goes on and it becomes obvious that the market has peaked, I fear the downdraft will be horrific.

Mon, 01/14/2013 - 13:21 | 3151033 GaryNeville
GaryNeville's picture

People have been waiting for the horrific downdraft for 2 years now - sorry but it aint gonna come! The free market doesn't exist anymore - any threats or defaults will be managed in a 'controlled' manner. If you think the global banking cartel is going to let another Lehman happen then think again!

Mon, 01/14/2013 - 12:19 | 3150736 buzzsaw99
buzzsaw99's picture

To the FAZmobile!

Mon, 01/14/2013 - 12:30 | 3150770 Jayda1850
Jayda1850's picture

The TVIX debacle was if for me. After that, I stuck with just buying physical. I'm better off just betting on football when I get that gambling urge.

Mon, 01/14/2013 - 12:26 | 3150755 forwardho
forwardho's picture

Ruled by violence and vice.

We all stand upon thin ice.

Are we brave or are we mice, here upon such thin, thin ice?


Dare we linger, dare we skate?

Dare we laugh or celebrate, knowing we may strain the ice?

Preserve the ice at any price?


;Book of counted sorrows

Mon, 01/14/2013 - 12:26 | 3150758 Caracalla
Caracalla's picture

Glad I didn't buy that Apple dip on Friday!

Mon, 01/14/2013 - 12:28 | 3150764 optimator
optimator's picture

Not to worry, they'll give you another chance.  (sarc)

Mon, 01/14/2013 - 12:28 | 3150761 Cognitive Dissonance
Cognitive Dissonance's picture

Once again it looks like Lucy has set up Charlie Brown for a nasty fall.


Greater Fool

<The greater fool is fooled again.>

Mon, 01/14/2013 - 12:29 | 3150769 Catullus
Catullus's picture

I keep thinking about this "technical default" scenario coming up. Has anyone asked the ISDA if the supposed technical default triggers the CDS' on US Treasury debt? Remember when they pulled the bullshit that Greece only "technically" defaulted?

I feel the return of "what exactly do these things hedge?" being asked again

Mon, 01/14/2013 - 13:05 | 3150934 Cognitive Dissonance
Cognitive Dissonance's picture

"They" can declare whatever they want to declare did or did not happen. Bottom line is how scared will everyone be about the consequences of declaring that the CDS defaults were triggered and what are the consequences of that for everyone, not just those who would benefit from the default?

In many respects this is how you compel everyone to agree to conditions you would think were against many people's best interest. The tyranny of the majority conundrum. It really doesn't matter what the law says, just what the majority (or the powerful) want the law to say.......and to ignore.

Mon, 01/14/2013 - 12:38 | 3150803 NoDebt
NoDebt's picture

The same hedgies who did WORSE than boring old Mutual Funds last year (who themselves regularly fail to beat their index)?

Alpha eventually just becomes Beta.  Too many hedge funds chasing too few good investing ideas.  Pay your 2 & 20, if you want, but I think you're probably just flat-out overpaying with almost all of them.  NOT the dudes who run AAPL's internal hedge fund- they rock.  But everyone else's "garage band" hedge fund. 

You know an investing idea has "jumped the shark" when they come on the TV and start telling you about how they provide a "non-correlated" return to the market.  Oh, PUHLEEESE.  Guess what other non-correlated asset class I can name in 1 syllable that starts with letter G and doesn't cost 2 & 20 in fees?  Actually, I can name TWO that fit that description.



Mon, 01/14/2013 - 12:41 | 3150830 Village Smithy
Village Smithy's picture

"garage band" hedge fund. So aptly put!

Mon, 01/14/2013 - 12:41 | 3150831 lemarche
lemarche's picture


Mon, 01/14/2013 - 13:18 | 3151021 Michelle
Michelle's picture

lemarche, I agree with your logic with 2004 being only a year into a new bull market. However, 2013 is 4 years into a bull market, longer than average. Hard to say where we're headed I think it's obvious more inflows or more leverage have to pour in to keep the balls in the air.

Mon, 01/14/2013 - 13:38 | 3151104 lemarche
lemarche's picture


Mon, 01/14/2013 - 21:56 | 3152842 no say
no say's picture

caps = yelling ;-)

Mon, 01/14/2013 - 12:55 | 3150892 Downtoolong
Downtoolong's picture

It would be fine if all the debt backing this hubris was really the responsibility of the gamblers and banks providing it to them. But, practically speacking, with so much of the debt backed by the Fed, it really is the peoples money they're using. Thanks to the Fed's money printing, the entire system has evolved to the most gigantic example of heads I win and tails you lose that ever existed. Guess which side of the deal you're on?  

Mon, 01/14/2013 - 13:12 | 3150991 q99x2
q99x2's picture

Aren't stocks and markets US Gov't owned and operated such that you really can't lose any money unless you take it out early? I mean like a sort of pension that everyone can participate in. That's why they are called free markets. Right?

Mon, 01/14/2013 - 13:23 | 3151044 rlouis
rlouis's picture

Newtonian physics dealt with a different AAPL - but even this one couldn't defy gravity foreva.  To the moon Alice... to the moon

Mon, 01/14/2013 - 13:32 | 3151081 DowTheorist
DowTheorist's picture

It seems leveraged speculation also concerns short positions, not only longs. For the time being, the primary trend is bullish, so caution suggests not to short with utter disregard to price action. Furthermore, as per the Dow theory track record, the odds for the bullish trend to continue and fetch higher prices average 70%. While nothing is carved in stone, and the primary bull market may be stopped on its tracks right now, the odds favor higher prices, not lower.





Mon, 01/14/2013 - 13:48 | 3151157 yogibear
yogibear's picture

Just a bit more enticement to suck in the retail investor. Once their all in the professionals dump.

Classic bag-holding.

Mon, 01/14/2013 - 13:56 | 3151209 Uncle Zuzu
Uncle Zuzu's picture

The hedge fund business model is hanging by a thread. They are too scared to 'insider-trade' any more.  The only way left to juice up returns is through leverage.  Another down year and AUM will halve from $2 trillion to $1 trillion.  And that would still be too high by $900 billion.  You know the administration wants to kill this business, and it probably will.

Mon, 01/14/2013 - 20:03 | 3152586 BringOnTheAsteroid
BringOnTheAsteroid's picture

"People have been waiting for the horrific downdraft for 2 years now - sorry but it aint gonna come!".

Fascinating insight into the way humans think. To say there will be never another stock market crash is taking "this time is different" thinking to the extreme. I think you allocate way too much esteem to these so called power elites. While you may think they are a cut above the rest in actual fact they probably spend alot of there time snorting coke and wearing womens panties while being fingered in the ass by a hooker. 

Tue, 01/15/2013 - 03:28 | 3153428 nastaking
nastaking's picture

Consumers may remember the Agora name from 2009 — it's the year Kogan promised to launch two Android Ampe A90

Tue, 01/15/2013 - 05:05 | 3153474 resurger
resurger's picture

It has always been whoever blinks out first wins, goodluck in jumping the broken ship when earnest cannobalization begins ..

i.e Goldman sachs leveraged 360times their capital...

will they be the first to jump!

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