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Do you have any reference on `legit factor stats`? I do not understand how leverage will be beneficial. Leverage will also multiply the potential downside risk

Do you have any reference on `legit factor stats`? I do not understand how leverage will be beneficial. Leverage will also multiply the potential downside risk after all? I would like to understand more how the trading cost would make up for it on average.

pedrosorio 6y ago
> I do not understand how leverage will be beneficial. Same here, if I understood the grandparent they were saying you lose 0.04% on every trade (from spread) and "in a year" that is 10% (250 trades?). If you have a strategy that has expected returns of x bips per trade then you make an expected x-4 and with leverage 4 * (x - 4). Both have the same "sign", so if x-4 is expected positive, leverage just makes it higher risk-reward. In fact with leverage you also have to pay interest on the loan, which seems to be at least ~18 bips (or 3/4 of that since the returns are on 4 * cash and interest is on 3 * cash) for a single day loan (far exceeding the "spread cost"): https://www.schwab.com/public/schwab/investing/accounts_products/investment/margin_accounts https://www.schwab.com/public/schwab/investing/accounts_prod... It seems the only way leverage would help is if there were fixed costs to trading (which I assume there are but the GP does not mention).
- pedrosorio 6y ago
  I was just reading their docs [1], and I got two things wrong above: - Schwab's overnight interest rate is actually ~1.8 bips. Alpaca's is even lower at 3.75% annual which translates into ~1 bip / day - If you liquidate stock the same day, you pay no interest [1] https://alpaca.markets/docs/trading-on-alpaca/margin-and-shorting/ https://alpaca.markets/docs/trading-on-alpaca/margin-and-sho...
- smabie 6y ago
  Well you have 504 trades approx, but you're buying in and selling out, so you're paying the cost of spread once per day (252 trading days in a year). Let's say you have have a strategy that has 7% return and 3% volatility. That's a pretty fucking amazing strategy. So you lever up to 4x and now you have 28% return and 12% vol. With your spread tax, you now have 18% return and 12% vol. Using their 2x leverage, you'll have a 14% and a 6% vol. So while your Sharpe ratio will be lower, your max return will be higher. And since you can't eat risk-adjusted returns, the tradeoff could very well be worth it.

pedrosorio 6y ago

> I do not understand how leverage will be beneficial. Same here, if I understood the grandparent they were saying you lose 0.04% on every trade (from spread) and "in a year" that is 10% (250 trades?). If you have a strategy that has expected returns of x bips per trade then you make an expected x-4 and with leverage 4 * (x - 4). Both have the same "sign", so if x-4 is expected positive, leverage just makes it higher risk-reward. In fact with leverage you also have to pay interest on the loan, which seems to be at least ~18 bips (or 3/4 of that since the returns are on 4 * cash and interest is on 3 * cash) for a single day loan (far exceeding the "spread cost"): https://www.schwab.com/public/schwab/investing/accounts_products/investment/margin_accounts https://www.schwab.com/public/schwab/investing/accounts_prod... It seems the only way leverage would help is if there were fixed costs to trading (which I assume there are but the GP does not mention).

pedrosorio 6y ago
I was just reading their docs [1], and I got two things wrong above: - Schwab's overnight interest rate is actually ~1.8 bips. Alpaca's is even lower at 3.75% annual which translates into ~1 bip / day - If you liquidate stock the same day, you pay no interest [1] https://alpaca.markets/docs/trading-on-alpaca/margin-and-shorting/ https://alpaca.markets/docs/trading-on-alpaca/margin-and-sho...
smabie 6y ago
Well you have 504 trades approx, but you're buying in and selling out, so you're paying the cost of spread once per day (252 trading days in a year). Let's say you have have a strategy that has 7% return and 3% volatility. That's a pretty fucking amazing strategy. So you lever up to 4x and now you have 28% return and 12% vol. With your spread tax, you now have 18% return and 12% vol. Using their 2x leverage, you'll have a 14% and a 6% vol. So while your Sharpe ratio will be lower, your max return will be higher. And since you can't eat risk-adjusted returns, the tradeoff could very well be worth it.