Bring it on!The main change here is an increase to the allowed...

Bring it on!

The main change here is an increase to the allowed gross exposure. To accomodate that change, naturally the allowable numbers and sizes of individual stock positions need adjusting.

Intuitively increased gearing does increase risk. However, personally I’m comfortable with the amendment to increase market exposure. The facts I consider are that whilst leverage against a single business is risky, we are talking across a whole portfolio and the net exposure is going to be positive, so this has the potential to turbo charge the returns on their ideas and thus heighten the probability of (finally) outperforming the street. So I reckon actually there’s less risk of the opportunity cost of underperforming the indices.

The increased exposure per unit of ownership can amplify both positive and negative movements. Personally I’m not concerned about the possibility of magnifying losses, especially over longer time horizons, and if I didn’t believe that the Fund could achieve a greater than 0% return over the long term, I wouldn’t be owning their shares.

So hypothetically, where before, a 100% net may have consisted of 125% long with 25% short, from July the same 100% net could for example comprise 150% long + 50% short, so increasing each of the long and short portfolios by 25% to bring the total exposure up by 50% from 150% right up now to 200% gross.

So this means, theoretically:

1. If the returns tend to correlate with market and the market rises, then the long and short prices might both rise, so after the short returns cancel out some of long returns, the returns might be around 100% of (i.e. comparable to) what they were before - i.e. due to the same net exposure as before. Similarly if the market goes down, might go down by the same as before.
2. If, however they get most things right and the longs go up and shorts go down then the returns could approximate the 200% gross return, thus mathematically possibly doubling the previous returns.
3. If they somehow have the short market prices going up yet the longs going down, there’s the potential for massive losses.

Each to their own.

The market seemed to like it and yesterday participants voted favourably with their wallets. RPL up 7% on high volume, as improved performance across their Funds would flow through to bottom line. VG1 just made 52 week high today, VG8 is up also.

DYOR.