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U.S. hedge funds increase leaverage in August - report

* Leverage up 3.2 pct in August from July, up 5.4 pctyear-on-year

* Levels still lag 2012, 2011 and pre-crisis peaks By Katya Wachtel

NEW YORK, Oct 8 (Reuters) - U.S. hedge funds and otherclients of Wall Street investment firms raised their level ofborrowed money in August, a sign they may be more confident inthe markets, data published Monday showed.

Leverage rose to $286.6 billion last month, according to NewYork Stock Exchange margin debt data, up 5.4 percent sinceAugust last year. It is the first time in nine months thatmargin debt has increased on a year-over-year basis, analysts atBank of America Merrill Lynch showed in their Hedge FundMonitor report.

Leverage levels "can be used as a sentiment indicator" sothe increase could mean investors have regained some confidencein the market, the report said.

While the level of leverage recorded in August is a 3.2percent rise on July levels, it still lags the amount ofborrowed cash that investors were using to make bets in thestock market before Lehman Brothers collapsed, according to NYSEdata.

Hedge funds have gained about 5 percent this year throughSeptember, according to hedge fund tracking firms, but stilltrail the broader stock market. The S&P 500 index rose more than16 percent through September.

August's rise in leverage could be an indication that hedgefunds and large investors, reassured by rallying stock markets,are willing to use more borrowed money try and amplify theirreturns, though another month of data would be needed to confirmthis, Bank of America analyst Mary Ann Bartels said in an email.

Before the financial crisis, hedge funds, particularly thosefocused on bets in credit markets, used leverage in differentforms boost returns, such as increasing exposure to inherentlylevered products like derivatives, or by using margin orborrowed money from Wall Street.

In 2007, NYSE margin debt rose above $317 billion and stayedthere for the remainder of the year, hitting a peak of more than$381 billion that July.

Investors reduced their leverage in 2009 and 2010 to levelsas low as $173 billion and then began to borrow more money againthrough July of 2011. Spooked by whipsawing markets last summer,which devastated the portfolios of some of the country'ssavviest investors, money managers took off leverage again inthe second half of the year.

Through August, NYSE margin debt is down about 4 percentfrom its 2012 peak of $298.5 billion, recorded in April.Beginning in May risk-averse investors reduced leverage, pullingback from global financial markets riled by fears that Greecewould exit the deeply troubled euro zone.

Margin debt remains down roughly 10.6 percent from itspost-2008 peak of $320.7 billion, which it reached in April lastyear.

NYSE member organizations are required to report monthly thetotal amount of money borrowed by customers to purchasesecurities.

While hedge funds have yet to ratchet up to pre-crisislevels, or even to the highs of 2011, Bank of America analystssaid the fact that investors increased leverage last month is apositive sign.

Margin debt is one way to measure how much risk hedge fundsand other large investors are taking by using borrowed cash, butit fails to address or measure the exposure those firms have to'embedded' or 'hidden' leverage, which they can obtain byinvesting in structured products like collateralized loanobligations or asset-backed-securities, which are more highlylevered in themselves. Some hedge funds have been eyeing thoseriskier, more exotic assets in their hunt for yield.

Data published Friday by BarclayHedge and TrimTabs showedthat hedge fund managers "are strongly inclined to maintaincurrent levels of leverage," and "plans to lever up fellslightly in September while plans to reduce leverage climbed bya small margin."

(Reporting By Katya Wachtel)

((Katya.Wachtel@thomsonreuters.com)(+1 646 223 6203))

Keywords: HEGDEFUNDS LEVERAGE/