What is the leverage effect?

The leverage effect means how much times you can trade in comparison to the actual notional value. This name is derived from the "Principal of lever" which small power (small amount of money) with a stick can move a heavy and big stone (big amount of money for trading). The US hedge funds have made huge profits using this leverage effect successfully in latter of 1990's. According to some sources, they are heard that they put about 100 times as much leverage effect as the principals of their funds. This effect sometimes gives bigger chance to take huge profits, but sometimes causes bigger losses in the same way. A lot of hedge funds fell in default around 1998 as you remember.