What it means to say that a hedge fund is leveraged 14:1 ? What is leveraged?

Question

can be other things leveraged (not hedge funds?).

Answer 1

Leveraging is using a loan for investments.

So a hedge fund is leveraged 14:1. That means, for every $1 the hedge fund invests, they get $14 in financing from their bank.

Woe to the hedge fund that makes a bad investment at a 14:1 leverage ratio. Very risky stuff.

Answer 2

Leverage is debt. In this case the hedge fund borrows money to buy more of something.

Many us use leverage to buy our homes and our cars. We borrow so to buy more of something. I can buy a bigger house by using leverage, a mortgage, than if I had to pay cash.

Hedge funds use leverage to magnify their returns, but this is a two edged sword. When the investment is up, the leverage increase the gain significantly. But when the investment is down, the leverage also increases the loss.

Answer 3

Leveraging is basically financing the purchase of assets by borrowing as opposed to floating of shares or otherwise giving other forms of proprietary rights. Any purchase of an asset (not just by hedge funds) can thus be financed by leveraging.

Answer 4

They borrow money to buy assets. If you buy a house for 100K and borrow 90K of it, you have 9:1 leverage. For hedge funds, if they make more than the amount it cost to borrow money, they juice returns. textbook.