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Leverage: Difference between revisions
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Positive “[[alpha]]” is extremely hard — some would say impossible, over an extended period — to generate. It requires the skill of a {{strike|Meriwether,|}} {{strike|Scholes,|}} {{strike|Fuld,|}}{{strike|Skilling,|}} {{strike|Huang,|}} Soros or Buffett. [[Vega]], on the other hand, is really easy to generate, as long as you have someone credulous to borrow from. | Positive “[[alpha]]” is extremely hard — some would say impossible, over an extended period — to generate. It requires the skill of a {{strike|Meriwether,|}} {{strike|Scholes,|}} {{strike|Fuld,|}}{{strike|Skilling,|}} {{strike|Huang,|}} Soros or Buffett. [[Vega]], on the other hand, is really easy to generate, as long as you have someone credulous to borrow from. | ||
From a distance it is easy — and, when the portfolio is doing well, ''tempting'' — to confuse [[alpha]] and [[vega]], and many [[hedge fund]] managers do. There is a survivor bias problem here of course, because hedge fund managers do not often get the opportunity to talk about their negative alpha performance, because by the time it happens, the fund has typically imploded. | From a distance it is easy — and, when the portfolio is doing well, ''tempting'' — to confuse [[alpha]] and [[vega]], and many [[hedge fund]] managers do. There is a [[Survivorship bias|survivor bias]] problem here of course, because hedge fund managers do not often get the opportunity to talk about their negative alpha performance, because by the time it happens, the fund has typically imploded. | ||
It was leverage, not anything more difficult to understand than that, that caused the implosion of LTCM, the global financial crisis, and the [[Archegos]] affair. | It was leverage, not anything more difficult to understand than that, that caused the implosion of [[Long-Term Capital Management|LTCM]], the [[global financial crisis]], and the [[Archegos]] affair. | ||
Quite how such an ugly {{tag|metaphor}} shape-shifted into an all-purpose business {{tag|verb}} is anyone’s guess, but it is time it was sent back where it came from. With leverage. | Quite how such an ugly {{tag|metaphor}} shape-shifted into an all-purpose business {{tag|verb}} is anyone’s guess, but it is time it was sent back where it came from. With leverage. | ||