Hedge funds are using more leverage reflecting an increased appetite for risk, according to the FSAs bi-annual survey on hedge funds and systemic risk.
Measuring from October 2009 to April 2010, the survey also discovered that hedge funds are borrowing more through repo transactions, and less through prime brokerage.
The survey of 90 funds with around $345 billion of hedge fund assets under management also suggested that the proportion of the funds assets under their high water mark has decreased to 10% in April 2010, from around 50% in October 2009. According to the Dow Jones Credit Suisse Hedge Fund Index, hedge performance increased by 7.3% over the same period.
One fund also held potential exposure to one unnamed bank of $600 million. The average potential credit exposed of single banks to single hedge funds amounted to less than $51 million.
Fixed-income arbitrage strategies also increased rapidly. Between October 2009 and April 2010, fixed-income arbitrages gross imprint, or the percentage of their positions as a multiple of investor equity, increased to 1400%, up from 800%. According to the report: This is in line with an increase since October 2009 in the amount of financing provided under global master repurchase agreements as a percentage of total borrowing by surveyed hedge funds.
Emerging markets, one of the key trends for hedge fund investment, was the only strategy to decrease in footprint, falling around 10% to 200%.
The full report can be found here