Stupid Question on MMHFs
If they run a market neutral strategy, which then returns low mid single digits at best, how do these funds achieve 20%+ yearly gains? Is it leverage?
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No,
Generally each pod is given a capital with a leverage. As a rule of thumb, quantitative guys get somewhere around 3-10x leverage, while fundamental l/s guys get around 1-2x. Same goes for credit, vol, etc.
So, each pod may run $1B book, but the capital commitment from the multi-strat fund itself is likely much smaller. So if you sum up all these, that's how they are able to deliver such a high return.
Example, say you run $1B GMV book with $250m capital (which is equivalent to 4X leverage). If you generate 3% of return on your GMV, your P&L in dollar term is $30m.
If you measure this $30m with respect to capital, then your return is 12%, not 3%.
Thanks.
So yes, it is leverage
No, it's not leverage. It's just using debt to amplify your skillfully created returns with magic. Pay attention.
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