Hedge Fund Leverage Before and after the Crisis

Abstract

We present new evidence on the use of leverage by hedge funds and on how this changed following Russia's default and the near failure of Long-Term Capital Management in the summer and fall of 1998. We use regression techniques and survey data to analyze how leverage varies with fund attributes. We show that leverage varies with investment style, regulatory status, and a variety of other fund characteristics. While the use of leverage fell across the board between 1998 and 1999, it appears that hedge funds whose investment styles, regulatory status and other attributes were associated with the greatest utilization of leverage before the crisis reduced their use of it most sharply thereafter.