Comments (14)

Aug 13, 2019

I can give you my grandmother's phone number if you'd like.

Sep 8, 2019

Anyone else have any other ideas/recommendations?

Sep 8, 2019

Bridgewater's clients

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Sep 8, 2019

AQR's defensive style factor investing comes to mind.

Snootchie Bootchies

Sep 8, 2019

From what I know about Macro HF strategies, they tend to be directional with respect to systematic variables like points on the yield curve or sectors of equity markets. As a result, I'm not sure you can get a low VaR Macro HF ( unless it's a flat book).

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Sep 8, 2019

The part that's important is the Sharpe ratio and correlation. Low volatility and low return sound to be a Sharpe ratio of 1. At this level, you can leverage it to any risk you want and be a top hedge fund, within reason. Look at multi-managers, PMs that have a volatility of 3%, a return of 4%, correlation of 0, and make millions.

The caveat, Sharpe ratio isn't the end-all be-all, but it's a guide.

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Sep 9, 2019

Jimmy - that was v helpful! Thank you. I hope you don't mind if I follow-up with a few further questions:

  1. If the strategy itself were levered as a single manager fund, I imagine that would put the strategy on par with other funds that had the same higher-vol, higher-risk characteristics?
  2. How typical is it for an emerging fund to be levered from the outset?

3a. I imagine the strategy could be levered via an SMA if investors requested it?

3b. Do you think its worth promoting that levered-SMA option, or are institutions savvy enough to request it if they see the type of numbers you mentioned?

Thanks very much in advance!

Sep 9, 2019

I can help you, check your PM.

Sep 9, 2019

One important point before we start is, you can leverage the excess return. If the return of stocks is 7% and the borrowing rate is 2% your excess return is 5% = 7%-2%. Therefore, leveraged return = excess return * leverage + treasury rate, leveraged volatility = volatility * leverage, and Sharpe ratio = excess return / volatility.

To answer your questions:
1. If two funds have the same Sharpe ratio they can be leveraged up or down to produce the same return and risk. The goal is to produce a return, for the least possible risk.

  1. Most hedge funds are levered 2x-5x and asset manager funds generally don't use leverage. There are some in-between cases like Bill Ackman who is a hedge fund but doesn't use leverage.

3a. There are multiple ways to get leverage, the easiest is using futures as you only need a small percentage of the contract's value. It gets more complicated when you borrow cash by using the stocks or bonds you hold as collateral. For an individual, you use a margin account. For institutional investors, it can be done in most account types, including an SMA.

3b. It's very common to promote the leveraged form of a strategy because you want to impress potential with the big return number. From there leverage can be adjusted to meet a client's goals.

For example, hedge funds like DE Shaw and Bridgewater are leveraged 4-5x and only market leveraged versions of their funds. This information is publicly available.

Sep 10, 2019

I'm not sure you understand what the Sharpe ratio represents. A sharpe of 1 implies your returns don't exceed the volatility of returns. Under such a scenario, it makes no sense to lever up. Multimanagers do lever up, but because the succesful ones generally aim for a Sharpe of 2+ that allows them to lever returns without vol getting out of hand.

To the original question, insurance cos, pension funds and family offices are likely to be interested. Assuming you can deliver a Sharpe >1.

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Sep 10, 2019

Sorry, I don't think I'm understanding your comment. Funds do leverage a ratio of 1. A strategy with 15% excess return and 15% volatility isn't getting out of hand, that's the historical risk of equities.

DE Shaw has a ratio of ~1.33 and leverages it 4x, last I saw. I've even seen funds leverage a ratio of 0.40.

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Sep 10, 2019

For a macro fund that trades FX and Rates, with a sharpe of 0.7, with vol and var of 3-5, would it be wise to consider offering a levered strategy? Or would another option be hiring additional PMs to the fund to make use of the var? Any other options we could explore?

Sep 13, 2019
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