The growth in the hedge fund industry has increased the importance of measuring how hedge funds achieve their returns. Since many funds either explicitly or implicitly use leverage, a useful question is whether hedge funds merely represent an expensive way to use leverage.
In an article published in the Winter 2007 Journal of Wealth Management, Jean Brunel finds that simple leverage does not appear to be the primary determinant of market-neutral or long-short hedge fund returns. Instead, three broad themes emerge:
- Beta leverage is not a strong element of long-short or market neutral returns
- Hedge fund return replication requires dynamic management of leverage
- When hedge fund managers use leverage, they tend to lever their value added skills rather than generic risk exposures