In the book Alpha Masters, Dan Loeb discusses the risks of using leverage. Here’s an excerpt from the book:
“If you take a 10 percent return in security and lever it up four times and after financing costs generate 15 or 20 percent returns, you haven’t increased your returns. You’ve just increased your leverage and significantly increased your risk.
But you’ve also got a 20, 25 percent downside threat, so if the trade goes against you, you’ve lost 100 percent of your capital. Look at all the supposedly low volatility leveraged funds that blew up in 2008—due to too much leverage. We don’t leverage anything. We look at everything on an unlevered basis.”
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