We develop an analytically tractable model of hedge fund leverage and valuation where the manager maximizes the present value (PV) of management and incentive fees from current and future managed funds. By leveraging on alpha strategies, skilled managers create value. However, leverage also increases fund volatility and hence the likelihood of poor performance, which may trigger money out ow, drawdown/redemption, and involuntary fund liquidation, causing the manager to lose future fees. The ratio between assets under management (AUM) and high-water mark (HWM), w, measures the manager's moneyness and is a critical determinant of leverage and valuation. Our main results are: (1) despite high-powered incentive fees, the risk-neutral manager often behaves in a risk-averse manner and chooses prudent leverage because downside liquidation risk is quite costly, in contrast to the standard risk-seeking intuition; (2) leverage tends to increase following good performance and to decrease as liquidation becomes more likely despite time-invariant alpha; (3) both incentive and management fees contribute importantly to the manager's total value; (4) performance-linked new money inflow encourages leverage and has large effects on the manager's value, particularly on the value of incentive fees; (5) the manager highly values restart options; (6) managerial ownership has incentive alignment effects; (7) the manager becomes risk loving and the leverage constraint binds as liquidation risk decreases.