(Bloomberg News) Hedge funds increased their net leverage in January to the highest level since October 2007, as they took advantage of record-low borrowing costs to bet that the U.S. equity rally will continue.
Debt at margin accounts at the New York Stock Exchange minus cash and unused credit from margin accounts climbed to $46 billion, according to data released by NYSE yesterday. Hedge funds had $290 billion of debt from margin accounts in December, the largest sum since Lehman Brothers Holdings Inc. collapsed in September 2008.
"It makes a lot of sense given the low cost of borrowing and some equities' valuations," said Patrick Armstrong, who helps manage $356 million in multiasset strategies at Armstrong Investment Managers LLP in London. "There is a capital- structure arbitrage to be made by buying stocks with leverage."
Money borrowed at NYSE can help gauge speculators' bullishness toward stocks; peaks in loans to investors have preceded market tops in the past. Margin debt peaked in February 2000 and in July 2007, before stocks plunged. Unused credit in margin accounts rose to a record high of $386 billion in August 2008, about seven months before the Dow Jones Industrial Average rebounded from a 12-year low to start an 85% rally to date.
Standard & Poor's 500 Index companies generate earnings per share of 6.46% from the original investment, according to data compiled by Bloomberg. That tops the yield on 10-year treasury bonds by 303 basis points.
U.S. stocks have fallen this week as oil surged to $100 a barrel after Libya suspended as much as two-thirds of its production amid clashes between protesters and Libyan ruler Muammar Qadaffi's loyalists.
Clients had $105 billion available in NYSE cash accounts, a sixth monthly increase and the highest sum since January 2009, and $139 billion in available credit in margin accounts, the NYSE data show.