If you thought the financial crisis put an end to the use of leverage to enhance investment returns, think again.
Money managers, seeking to boost bond returns for pension funds in an environment of near-zero interest rates, have taken to borrowing to do so, The Wall Street Journal reports.
The strategy has helped Fairfax County Employees' Retirement System earn a return of 19 percent in the year ended Sept. 30. The median return for public pensions during the same period was 17 percent, according to Wilshire Trust Universe Comparison Service.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
While leverage sparked the 2008-09 financial crisis, money managers say this time around is different, that they’re using safer forms of leverage and in smaller magnitudes.
Ray Dalio, founder of Bridgewater Associates, which uses the technique, known as risk parity, says it can “lower your risk in your overall portfolio.”
But leverage almost always enhances both your gains and your losses.
"The minute there is leverage involved it is going to kill you on the downside,'' Ashvin Chhabra, chief investment officer at the Institute for Advanced Study, tells The Journal.
Borrowing is on the rise in other areas of financial markets too. Hedge funds focusing on stocks have boosted their leverage to the highest level to start a year since at least 2004, according to Morgan Stanley, Bloomberg reports.
Again, some are concerned. “Maybe there’s a little too much optimism out there,” Peter Sorrentino, a portfolio manager at Huntington Asset Advisors, tells the news service.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
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