The hedge fund industry boosted its use of debt to maximize profits, increasing gross leverage to 67 times net asset value in a survey by the U.K. markets regulator from 64 times a year earlier.
The 10 biggest hedge funds in the study accounted for about two-thirds of gross leverage, the Financial Conduct Authority said. The survey covered $418.6 billion of assets managed by 52 firms as of September 2014, up from $375 billion in March 2014. The total includes $265 billion managed out of the U.K.
“The mean is skewed by a few large funds, mainly macro funds, that make significant use of leverage, whilst the median shows that the majority of hedge funds tend to use relatively low levels of leverage,” the FCA said.
Hedge funds and investment managers are drawing scrutiny from global regulators at the Financial Stability Board, which is considering classifying some as systemically important, potentially subjecting them to tougher rules. The FSB, led by Bank of England Governor Mark Carney, said last year that investment funds with more than $100 billion of assets should be assessed to determine if they’re too big to fail.
“The industry remains heavily concentrated,” according to the FCA survey. “The 10 largest funds account for 83 percent of the sample gross notional exposure.”
All of the companies in the survey are domiciled offshore, with 69 percent based in the Cayman Islands, the FCA said Tuesday on its website.
The FCA said global hedge fund assets stood at an estimated $3.1 trillion in 2014, showing “a clear trend toward larger assets under management, with financial turmoil in 2008 and 2009 only briefly interrupting this trend.”
In the 11 surveys it has conducted, the FCA said “28 funds have consistently participated, whilst 31 funds have only participated once between October 2009 and September 2014.”