Wall Street Journal- Hedge funds have become famous for using borrowed money to boost their returns. But the upheaval in credit markets is shedding light on another way they use it: to make themselves look bigger than they really are.
When reporting their assets under management, hedge funds typically refer to the amount of money they have attracted from investors — a practice long established by mutual funds and other investment firms. Many hedge funds also borrow money to increase their “leverage,” which amplifies their potential returns (and potential losses).
In recent months, as the market turmoil has forced many funds to cut back on their borrowing, it has become evident that some were adding in the borrowed money when reporting their size.
For example, bond fund Y2K said it had assets under management of $2 billion as recently as July. But after a tough summer, London-based parent Wharton Asset Management UK Ltd. said the fund actually had less than $100 million in investor capital, and that most of the rest had been borrowed.
