ECB Looks at Some Hedge Fund Myths in New Report

The use of leverage is also an important feature that distinguishes hedge funds from traditional investment funds and makes them substantially similar to banks. However, the leverage of a hedge fund is rarely comparable to or as high as that of a bank.

…A large part of forced or voluntary deleveraging has probably already occurred, so the risk of further selling pressure may have declined since the finalisation of the December 2007 financial stability review.

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Are funds blowing up, giving investors their money back to simply sail off into the sun-set? Everyone has a theory about changes in hedge fund attrition. However, there seems to be little doubt that the rate of new fund development is waning (chart, below).

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To compound the problem, fund closures are increasing. But contrary to what some might assume, they’re not blowing up. According to the ECB, many managers are simply throwing in the towel when they fall too far below their high water mark: