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Views on non-Normal markets [29]

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Bullet points include: Leverage magnifies upside and downside. Return potentials may be inadequate for investors without the use of leverage! Leverage seems to be linked to increased risk of fat tails. Even after adjusting for the implicit scaling of exposures. Leverage introduces risks not previously present (because of the need to fund the borrowing implicit in the leverage): Liquidity risk – the entity lending to the fund may in the future be unable or unwilling to continue to support current leverage, or do so only at an increased cost to the fund. Note difference between funding liquidity and market liquidity. Forced unwind risk – the funding arrangements may require an automatic unwind of the structure in adverse circumstances, locking in (very) poor returns to investors. Variable borrow cost risk – the market rates for the type of borrowing in question may rise unexpectedly

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