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Leverage: Difference between revisions
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{{a|glossary|}}“''Please leverage this template to facilitate our discussion''”. | {{a|glossary|}} | ||
==As a buzzword== | |||
“''Please leverage this template to facilitate our discussion''”. | |||
Not only does leverage not mean “use”; it isn’t even a {{tag|verb}}. It’s a {{tag|noun}}: it describes the effect of using a lever on a fulcrum. “Lever” is also a {{tag|noun}}, though you could at least use that as a {{tag|verb}}. But you would sound stupid: | Not only does leverage not mean “use”; it isn’t even a {{tag|verb}}. It’s a {{tag|noun}}: it describes the effect of using a lever on a fulcrum. “Lever” is also a {{tag|noun}}, though you could at least use that as a {{tag|verb}}. But you would sound stupid: | ||
:“Please lever this template to facilitate our discussion”. | :“Please lever this template to facilitate our discussion”. | ||
==As a technical financial term== | |||
“Leverage” – or “gearing” – came into the lexicon courtesy of the bankers. It properly describes the effect of borrowing money to invest: If you have ten pounds and you invest it, you get ten pounds’ worth of return. If you borrow ninety, add it to your ten and invest the lot you get one hundred pounds’ worth of return, minus your borrowing costs of the ninety. ([[Buzzword]]) bingo: you’ve created “ten times leverage” (note: still a noun) on your original investment. The more the market goes up, once it has passed your borrowing costs, the more leverage makes you look like a hero. But when it goes down — or just performs ''worse'' than your borrowing cost, it takes your shirt with it. | |||
In financial analysis, the effect of leverage is assigned the Greek character [[vega]]. This is to distinguish it from “[[beta]]” — the market’s performance as a whole — and “[[alpha]]” — an individual portfolio’s performance, without taking account of the effects of leverage, measured against the market [[beta]]. | |||
Positive “[[alpha]]” is extremely hard — some would say impossible, over an extended period — to generate. It requires the skill of a {{strike|Merriwether,|}} {{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 | |||
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. | |||
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. | ||
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{{sa}} | {{sa}} | ||
*[[Vega]] | |||
*[[Leveraged alpha]] | *[[Leveraged alpha]] | ||
*[[Long-Term Capital Management]] | *[[Long-Term Capital Management]] | ||