The Stunning Magic Of "New Normal" Hedge Fund Leverage

Tyler Durden's picture

The following chart, from the Balyasny Asset Management Q3 letter to investors, show just that: the magic of hedge fund leverage in the New Normal.

Specifically, it shows that while BAM's AUM from 2010 until Q3 2013 has increased only modestly (light blue), it is the dark blue bar portion that shows just how much "purchasing power", i.e., allocation, has been deployed by the fund, thanks to the good graces of its Prime Brokers, who have allowed it expand its leverage from 100% to nearly 500%! Compare this to the peak leverage in the old normal which was roughly half: yes, that was at a time when the so-called credit bubble exploded. It has now doubled.

From BAM:

During our soft-close period over the last two years, we have doubled the size of our allocations and our balance sheet while keeping AUM roughly the same. Our plan is to accept only enough new capital to allow us to keep our assets / notional dollars allocated ratio at 1 to 5.


We find that portfolio managers on average utilize about 70-80% of their maximum allocations – so $1 of assets to $5 in notional allocated dollars typically results in our target gross leverage of 3.5-4x. We will be very disciplined with this so please let us know as early as possible if you are interested in increasing your allocation next year.

Of course, when one is levered nearly 5x, being "very disciplined" is usually a good idea.

But who would be on the hook should things turn south, and the massive leverage blows up in the face of Balyasny and its LPs? Not Balyasny of course, but the Prime Brokers who provided the fund with 5x leverage. Prime Brokers who just happen to be the same TBTF banks that were bailed out last time around, and which will have to be bailed out once again as soon as the Bernanke levitation finally ends.

But most importantly, the chart shows quite clearly that without any new equity injections in the market, the one and only source of incremental "capital" injected into risk assets is, you guessed it, debt.

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alphamentalist's picture

all parked in momo stocks, too. this market is a perfect doomsday device.

spastic_colon's picture

momo stocks and momo currencies....thank todays action on POMO, PCLN and USD/JPY......apparently we have found where all those exports are going....oh wait

Buckaroo Banzai's picture

10 INPUT "What is your name: "; U$
20 PRINT "Hello "; U$
30 INPUT "How many STAWKS do you want: "; N
40 LET S$ = ""
50 FOR I = 1 to N
60 LET S$ = S$ + "STAWKS "
90 INPUT "Do you have more Dollars to buy more STAWKS? "; A$
100 IF LEN(A$) = 0 THEN GOTO 90
110 LET A$ = LEFT$(A$, 1)
120 IF A$ = "y" OR A$ = "Y" THEN GOTO 30
130 INPUT "How many Dollars do you need to buy more STAWKS: "; D
140 LET T$ = ""
150 FOR J = 1 TO D
160 LET T$ = T$ + "DOLLARS "
170 NEXT J
180 PRINT T$
190 GOTO 30
200 END

IllusionOfChoice's picture

Did you just write the digital Bernank? Stop it before it kills again!

Bob Sacamano's picture

Hey wait.....I think this is a loop....   Oh, you are sly.  I see what you did there.

RockyRacoon's picture

Doomsday is over the horizon at this point.   All we can see is the glimmer of fire and brimstone shining above the line, where today is just more trudging toward the horizon.  I'm not sure that we really want to get there and see that mythical $50K gold number.  It won't be pretty.

LawsofPhysics's picture

"numbers" will be irrelevant, possession will be all that matters.

lasvegaspersona's picture

re purchasing power of gold after reset:

I anticipate that I will be able to  buy the finest vehicle on the market for 1 or 2 ounces of gold....even if it is the finest oxcart...

Diogenes's picture

Here you go. What we have to look forward to.

Luxury horse drawn car for the Russian gangster

undercover brother's picture

impressive.  curious if part of that allocation is in legitmate hedges?  

Peter Pan's picture

Makes you wonder what the price of gold would be if the same amount of leverage was deployed.

Ham-bone's picture

Ummm, I think the same or far greater leverage is utilized in the gold market...against gold.  Naked shorts to infinity and beyond.  Leasing, rehypotheticating, selling what ain't yours.   This is the new normal.

alphamentalist's picture

most gold bugs fail to see that part of the trade. there is a lot of levered money parked in gold at the institutional level. and a lot of it at the hoarder level, too (at least in the developed markets). your average hoarder has a mortgage at the least, and probably CCs, student loans, etc. their gold is just one more asset on their LEVERED balance sheet.

FieldingMellish's picture

Most stackers that I know have no debt. Most people on the short side seem to use margin. In the end, it doesn't matter as physical is insurance.

Swarmee's picture

Such gold would be the strongest asset on their sheet according to Exter's Pyramid. What's the problem? NOT having phyz down there would be an issue.

Show me somehow who has no debt whatsoever in today's society? It's nearly impossible to get by without it, and if you are wealthy enough to not need it then you should still be using it intelligently to your advantage.

trebuchet's picture

fingers hovering over sell buttons as soon as the words " We will begin to taper our purchases..." passes the lips of the Fed.  Then its cicuit breaker time, liquidtity dry -up margin calls, 


HFTs will have dumped 1 million orders ber the word taper is finished.

Trimmed Hedge's picture

If you could get a cut of the profits, but not pay a dime if any losses -- wouldn't you do the same?

Of course you would...

RSDallas's picture

You can't make 20% sitting on your ass!  Party like it's 1999!

Downtoolong's picture

It's so easy even a chimp can do it.

What could possibly go wrong?

Besides, how else are they to justify taking 2 and 20?

RSDallas's picture

Barnank and the gang of thieves are setting these guy's up!  I can see it now.  These crooks are going to tank this market and these hedge funds will be forced to hand over billions if not trillions of quality assets over to the banks and presto the banks are in better shape.  Bernank and the gang do not give a shit if the investor crowd takes a bath at this point.

IllusionOfChoice's picture

That sounds reasonable to an extent because the banks probably have deeper pockets than most, but since the banks are essentially giant hedge funds, that scenario would rely on them being too big to fail, and a government bailout (Fed?) following a crash, right?

It definitely makes sense as far as keeping up with the continued centralization theme we've seen playing out, and it would give the political authorities the right to react however they want...

I'm in, but my trading terminal doesn't have a naked short everything button like theirs does.

RSDallas's picture

The bank doesn't have to mark to anything other than fairy dust.  They are already cesspools.  Look, Bernank knows he has created this fictitious equities market with his fairy dust and he also knows that all he has to do to tame it is to wipe it out, or at least kick it in tis nuts.  Just look at the 10 year treasury.  Somebody knows something somewhere.  

chdwlch1's picture

Truer words have never been spoken...

"Somebody knows something somewhere."

yogibear's picture

Anyone that setup themselves up and force these heges to dump would make a fortune.

You have to think Goldman or JPM is thinking about this one-sided market. 

The crimninal cogs are moving....


alangreedspank's picture

Let's see what happens when they can't roll over their debt into cheaper debt, but costier debt. Bring out the popcorn.

chdwlch1's picture

To me, there is a big difference between the 2008 TBTF bailout and the impending 201X bailout. The 2008 bailout was accomplished through the egregious issuance of debt based currency by global central banks that will most assuredly burden future generations. The next bailout is being setup to "legally" steal the deposits/retirements of the current generation. 

"The issue that has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." - Lord Acton

Its Only Rock N Roll's picture

OK, this one really interested me.  Here are their holdings:

Some sort of long/short strategy.  I guess that's why they feel they can lever up at 5 to 1. 

And from their website:

The risk management and capital allocation process has been honed through almost 10 years of real life experience in challenging markets.  

10 whole fucking years!!!!!

This time really is going to be different.  There will be levered players who go to ZERO in very short order.  They will be jumping out of windows in Chicago at BAM!

...out of space's picture

yp jim rickhards got a point when he said that everthing that got us in troble 2007/08 is now bigger much bigger