What Is the Correct Way to Calculate Gross Leverage for a Hedge Fund?

by Mark Kennan

Gross leverage measures the ratio of the long and short investments of a portfolio compared to the market value of the hedge fund. Long positions refer to those where the investor has bought the stock. Short positions refer to those where the investor short sold shares, meaning the investor borrowed shares and sold them, expecting the stock to fall so he can buy the stock back for less than they were sold. The larger the gross leverage of a hedge fund, the greater the short sales relative to the long positions of the hedge fund.

Add the value of the hedge fund's long positions to the hedge fund's short positions. For example, if the hedge fund has $30 million in long positions and $20 million in short positions, the total positions would be $50 million.

Calculate the equity, or net value, of the hedge fund. For example, if the hedge fund has $30 million in long positions, $20 million owed on the short positions, and $20 million in cash from the sales of the short positions, the equity in the hedge fund is $30 million.

Divide the value of the hedge fund's short and long positions by the equity of the hedge fund to calculate the gross leverage of the hedge fund. In this example, divide $50 million by $30 million to get a gross leverage ratio of 1.67.

Multiply the gross leverage ratio by 100 to calculate the gross leverage as a percentage. Finishing the example, multiply 1.67 by 100 to find the gross leverage percentage equals 167 percent.

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