Hedge Fund Lending Back To Pre-Crisis Levels

Lending by banks to hedge funds and private-equity firms is jumping to the levels seen before the financial meltdown, in a strategy that is high-risk and high-reward.

Banks including Morgan Stanley (NYSE: MS), J.P. Morgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) are offering leverage at levels that they have not provided in two years, according to a Wall Street Journal report.

The terms of borrowing have not eased to the point of two years ago, but are also improving.

In recent months Citigroup has cranked up lending by 10 percent, according to people familiar with the matter.

This activity comes in a financial climate that has seen the criticism of large financial institutions that have received government bailouts. These banks have been put under the microscope and urged to start lending to more consumers and businesses.

Banks feel safer lending to hedge funds and private-equity firms as this can be more lucrative than lending to consumers and businesses. Hedge funds provide the banks with an ability to sell quickly if the funds fall into trouble.

Revenue from trading commissions also provides banks with revenue from lending to hedge funds which adds to making the funds an attractive investment.

The risk levels that the banks are making are a result of which type of bets they are making on the funds. Banks are making bets ranging from long equity positions to short selling of stocks and buying of derivative instruments that are complex.

A record number of about 16 percent of all hedge funds closed in 2009. Some funds are nervous about taking on debt as fear of bankers losing their newfound excitement for loans.

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