Keeping it Simple with Simplify Asset Management Keeping it Simple | Ep. 9: Portfolio Efficiency and Return Stacking
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Mar 1, 2022 AI Snips
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Forms of Leverage Explained
- Leverage can be applied in various forms including nominal leverage, risk leverage, and non-recourse leverage, each with different risk profiles.
- Effective leverage use involves maintaining risk exposure rather than doubling nominal amounts, optimizing return potential without excessive risk.
Low-Cost, Efficient Leverage Methods
- Leverage cost can be very low when using futures or options due to the efficient market and financing costs tied to government rates.
- Using funds or ETFs with embedded leverage offers non-recourse benefits, limiting downside risk to invested capital.
Risks of Daily Reset Leverage
- Daily reset leveraged funds increase variance drag, causing underperformance over time due to path dependency and volatility compounding.
- Frequent rebalancing in leveraged products is designed to protect the fund, not buy-and-hold investors, warranting caution.