can someone explain why FI hedge funds use more gearing than equity hedge funds? Schweser just states this without any explanation (as usual)
Lots of reasons (assume we are not talking about converts or distressed or similar): a) Arbitrage - Most hedge funds would be placing arbitrage bets, say betting on the spread between German bonds and US bonds. The spread is less volatile than the bonds because the bonds are correlated. That means you need some pretty big positions to take on any risk. b) Fees - Hedge funds charge 2/20. How could you make any money taking just long positions in bonds after taking out the 2/20? Most bonds are just not volatile enough to leave the investor with anything. Hence, you leverage up thee bets so that if you are right there is money for the investor and the manager. c) Repo markets - There’s an easily accessible collateralized lending facility with bonds that can be used to build leverage. There is nothing as easy with equities.