How to avoid getting drowned by “average leverage”
| Aug 3rd, 2010 | Filed under: Hedge Fund Operations and Risk Management, Performance, Analytics & Metrics, Today's Post | By: AAA Staff |
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How Much Leverage Is Dangerous? It depends on where you put it.
Averages are among the most dangerous yardsticks in investing. After all, people regularly drown in rivers with an average depth of six inches. Similarly, average risk can be quite misleading – if your standard deviation is 20%.
But survivors of the Great Liquidity Crisis of 2008- 2009 know that. The question now is how to gauge risk and cage it appropriately. For most hedge funds, a major risk is leverage – and a major cause of bankruptcy. But what is acceptable leverage – leverage that can be controlled – and what is not?
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