Hedge fund industry leverage declined in the last 12 months, according to the HFR Leverage Report, released today by Hedge Fund Research, Inc. (HFR). Leverage declined as investor inflows and less volatile performance gains combined to increase global hedge fund industry assets to a record $2.02 trillion.

Average standard leverage decreased across all hedge fund strategies from 1.27 to 1.10 times investment capital, while average margin to equity also declined, falling from 17.13 to 16.98 percent, year over year. The percentage of funds which do not typically utilize leverage rose to approximately one third of all funds, an increase of four percent over last year, while over half of all funds utilize leverage of between one and two times their investment capital.

Larger hedge funds characteristically employ a higher level of leverage: 23 percent of funds with greater than $1 billion in assets under management (AUM) utilize leverage of between two and five times investment capital. Although funds which employ leverage typically experience greater volatility, the performance difference between leveraged and non-leveraged funds since 2005 is not statistically significant.

Hedge Funds Outperform Inflation Benchmarks

Hedge funds offer investors attractive inflation-protected performance, with the HFRI Fund Weighted Composite outperforming benchmarks of inflation since 1990. In addition, hedge fund strategy leadership has varied across time periods of accelerating inflation, with Emerging Markets and Equity Hedge funds characteristically providing the greatest inflation protection.

Since 1990, hedge fund performance has been more highly correlated to changes in U.S. inflation than either gold or equities, and has had approximately the same correlation to inflation as commodities.

"The hedge fund industry reached a new record level of capital in 1Q11 by offering investors performance driven by prudent use of leverage, transparency and inflation protection over the long term," said Kenneth Heinz, President of HFR. "The industry has evolved to suit the requirements of sophisticated investors as an integral component of their portfolio allocations as they position for growth and global inflation in 2011 and years to come."

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