Its the leverage, stupid! Why we trade with borrowed money & must we do it?

By Indiatimes6 days ago

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I guess Bill Hwang, the former hedge fund manager who managed Archegos, would have made tonnes of money in his career using leverage correctly. To expect him to suddenly change style and behave like Warren Buffett is expecting every roadside robber to transform and become Valmiki.

He had a bad trade and, hence, blew up. If the trade has turned otherwise, he would have increased his billions and would have made it to the cover of a leading business magazine with a headline: The resurrection of Bill Hwang.

The blowup of a US hedge fund has resulted in the WhatsApp university offering many courses on what went wrong with Bill Hwang and Archegos. You will learn from so-called experts on why leverage is bad, how Archegos could have avoided the implosion and so on.

Let me try and explain in simple terms how leverage works in real life. For simplicity, I have used round numbers and one-year time frame. B is a smart investor, and he knows that shares of V will fly and rise by 30% in one year. He can either invest Rs 1,000 of his own money or borrow from a bank or an NBFC and invest.

If he invests using his own money, then at the end of one year, he will have Rs 1,300 worth of shares. So, he has earned Rs 300 on his investment of Rs 1,000, which is a 30% return on his investment.

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