Tell me how this will blow up in my face
Semi-degenerate personal investment question. I'm looking at going balls to the wall in a L/S HF with the following investment parameters:
- zero beta.
- returns of Rf + 3-4%.
- 20Y track record with average returns of 7%, max drawdown of 5%.
Here's the fun part. My broker gives me margin at Rf+150bps (4%), max leverage of 3:1 but i do 2.3:1 for buffer. The tax jurisdiction im in lets me deduct margin interest at the marginal rate (~50%, welcome to canada). Which technically gives me a below market interest rate.
Risks: Low long term interest rate risk as half the capital in the fund itself is in Rf. Low margin call risk by nature of L/S. Biggest risk I can think of is the fund manager somehow blows up.
Looking for the following - according to my math I can expect, AFTER TAX, about 10-12% annual returns on my equity (notably better than long term index returns, but with lower risk, and full instant liquidity) until I sell and pay capital gains. Can someone please tell me why I should not dump my entire bonus into this for as long as possible and have enough to retire at 40? Where is the catch in this? How is this going to blow up in my face?
Thanks in advance.
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