Re:Save like a pessimist, invest like an optimist
by marvin on Saturday November 14, 2020 @04:37PM
(#25095870)
And certainly you are well protected against black swan type events, even at 10x leverage...?
Re:Save like a pessimist, invest like an optimist
by smabie on Saturday November 14, 2020 @06:23PM
(#25096624)
Shit happens and even the smartest people can get fucked, just look at the LTCM blow up. So of course it's possible.
It's impossible to eliminate all risk, regardless of the leverage ratio. I'm just saying that leverage isn't a reasonable proxy for risk. You have to dig deeper.
Re:Save like a pessimist, invest like an optimist
by marvin on Sunday November 15, 2020 @10:12AM
(#25101762)
That sounds reasonable at first glance, but it would be really interesting to see a proper study of leveraged investments throughout the modern era, and their tendency to blow up compared to the volatility of what would be the reasonable alternative.
Re:Save like a pessimist, invest like an optimist
by ouid on Saturday November 14, 2020 @08:24PM
(#25097265)
if you have 10x leverage, your insurance against black swan events is to try to go 10x bankrupt.
Re:Save like a pessimist, invest like an optimist
by paulpauper on Saturday November 14, 2020 @04:59PM
(#25096020)
it really depends on the underlying asset. short dates bond trading involves large leverage because short-term bonds tend to not move much
Re:Save like a pessimist, invest like an optimist
by Def_Os on Saturday November 14, 2020 @06:08PM
(#25096544)
But increased leverage doesn't mean your risk-adjusted returns are any better.
Re:Save like a pessimist, invest like an optimist
by smabie on Saturday November 14, 2020 @10:10PM
(#25097887)
You can't eat on risk adjusted returns alone! gotta make that chedder
But leverage necessarily decreases your risk adjusted return assuming non zero volatility of the strategy. This is called "volatility drag."
Source: work at a small prop firm that takes on around 10x leverage. Even at this leverage ratio, we are considerably less risky than the S&P 500. Even at 10x, our volatility is somewhere between 1/2 to 1/3 of the S&P.
If you take on very little directional risk and are doing stat arb like us, there's nothing wrong with taking on a lot of leverage. Even at 10x, we are safer than the vast majority of retail portfolios in existence.
Leverage (through futures, options, shorts, or borrowing) is the cornerstone of almost all active outperformance in the industry. Without leverage, you will be forced into high beta names that trade at a premium compared to their risk adjusted return. See the "low beta anomaly" for more information.