HEDGE FUND LEVERAGE

We investigate the leverage of hedge funds in the time series and cross section. Hedge fund leverage
is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start
of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage
of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economywide
factors than by fund-specific characteristics. In particular, decreases in funding costs and increases
in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities
predict future increases in leverage.