Triple-Leveraged Cash

Friday, April 21st, 2023   Categories: , , ,

With apologies to Bloomberg Surveillance

Most institutional investors are not allowed to use leverage in their portfolios, which is a pity, because one of our models, which switches between a 100% leveraged portfolio of US equities and cash, has outperformed the S&P500 since inception in 1996. It has exactly the same as inputs and rules as all our other asset allocation models and it produces better absolute and risk-adjusted returns than 100% equity exposure, with a smaller drawdown. It also beats our equity/bond model, but is not as risk-efficient. This disproves the theory that investors cannot use timing to beat the market. They can, if they have a margin account, and know how to use it. For most of the last 30 years, this result could be dismissed as a curiosity because a mixed equity/bond portfolio did so well. In particular, bonds rose when equities fell. But if equity and bond returns stay positively correlated – as they currently are – for an extended period of time, institutional investors may need to explore the opportunities created by cash and leverage strategies.

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