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Theoretical maximum for hedge fund after 2008 was/is 12 to 1 leverage (at least in my case), any brokerage account with 100K+ (if not mistaken) can get portfoli

by neatze 5y ago

Theoretical maximum for hedge fund after 2008 was/is 12 to 1 leverage (at least in my case), any brokerage account with 100K+ (if not mistaken) can get portfolio margin that is 6 to 1.

warent 5y ago
I'm not sure I understand this fully. Are you saying that if you have an account with 1 million dollars in it, you could actually have 6 million invested with 5% returns, making something like 300k annually minus some margin fees?
- whoknowswhat11 5y ago
  Yes, but if the market goes south 20% the way it did just recently in 2020, they call you up and ask you to put in $5M more or they will liquidate everything that day. So it's not risk free.
- the_local_host 5y ago
  Yeah it's possible, but it makes more sense to think about negative outcomes before positive outcomes. With enough leverage, you lose half of your money if the market goes down 10%. With more leverage, you lose all your money if the market goes down a few percentage points, as your account gets liquidated on the spot.
- yellowstuff 5y ago
  I work in levered hedge fund strategies, so I have some insight here, although I don't negotiate financing myself. Banks tailor leverage to your strategy, so if your strategy is just to go long good stocks you won't get anything like 6X leverage. 6X leverage is realistic for a strategy that is long and short equal dollar amounts, and also carefully controls other risks besides dollar exposures. Also, you have to be fairly big to get that kind of leverage. $100 million is probably too small but $1B might be enough. So you put up $1B of your own money, and a bank would let you go long $3B and short $3B. The idea is that your longs hedge your shorts well so you can't lose too much. Obviously, in the case of Archegos the shorts didn't hedge the longs well.
  - neatze 5y ago
    You can get up to 12 to 1 leverage with 5+ million dollars account with most brokerage firms, but it will be substantially depended on your reputation as manager, fees you willing to pay and most importantly your market exposure. Assuming regulations did not change since 2014 or so.
- quickthrowman 5y ago
  If you want to understand, the search terms are ‘portfolio margin’ (equities and equity/index options) and ‘SPAN margin’ (futures and futures options)
hogFeast 5y ago
But does that apply to family offices? It sounds a lot like he was personally liable for these trades, which would explain why he appeared to be leveraged more than 10 to 1.

by neatze 5y ago

Theoretical maximum for hedge fund after 2008 was/is 12 to 1 leverage (at least in my case), any brokerage account with 100K+ (if not mistaken) can get portfolio margin that is 6 to 1.

warent 5y ago

I'm not sure I understand this fully. Are you saying that if you have an account with 1 million dollars in it, you could actually have 6 million invested with 5% returns, making something like 300k annually minus some margin fees?

whoknowswhat11 5y ago
Yes, but if the market goes south 20% the way it did just recently in 2020, they call you up and ask you to put in $5M more or they will liquidate everything that day. So it's not risk free.
the_local_host 5y ago
Yeah it's possible, but it makes more sense to think about negative outcomes before positive outcomes. With enough leverage, you lose half of your money if the market goes down 10%. With more leverage, you lose all your money if the market goes down a few percentage points, as your account gets liquidated on the spot.
yellowstuff 5y ago
I work in levered hedge fund strategies, so I have some insight here, although I don't negotiate financing myself. Banks tailor leverage to your strategy, so if your strategy is just to go long good stocks you won't get anything like 6X leverage. 6X leverage is realistic for a strategy that is long and short equal dollar amounts, and also carefully controls other risks besides dollar exposures. Also, you have to be fairly big to get that kind of leverage. $100 million is probably too small but $1B might be enough. So you put up $1B of your own money, and a bank would let you go long $3B and short $3B. The idea is that your longs hedge your shorts well so you can't lose too much. Obviously, in the case of Archegos the shorts didn't hedge the longs well.
- neatze 5y ago
  You can get up to 12 to 1 leverage with 5+ million dollars account with most brokerage firms, but it will be substantially depended on your reputation as manager, fees you willing to pay and most importantly your market exposure. Assuming regulations did not change since 2014 or so.
quickthrowman 5y ago
If you want to understand, the search terms are ‘portfolio margin’ (equities and equity/index options) and ‘SPAN margin’ (futures and futures options)

hogFeast 5y ago

But does that apply to family offices? It sounds a lot like he was personally liable for these trades, which would explain why he appeared to be leveraged more than 10 to 1.