I was sitting on a plane last night for a few hours and wasn’t enjoying my book – or the passenger in the seat beside me . I started to think about the amount of leverage I use – I started to wonder whether I might be under leveraged.

For example, imagine a scenario where you have a portfolio of 100 and you’ve allocated half your money to MOC with full intra-day leverage and half to other MR/trend following with full overnight leverage.

System Allocation Leverage Position
MOC 50 4 200
Other 50 2 100
Total 100 3 300

So, one could either:

– use higher leverage on the MOCs (i.e. 6)
– higher leverage on the Other (i.e. 4)

Of course, this assumes that it’s appropriate to use the maximum amount of leverage and that might not be the case due to drawdown/personal preference.

Is this something people are doing? It seems to me that maximum drawdown will increase but so will return and because they will be in proportion, metrics like Sharpe Ratio will be unchanged?

I’d really appreciate thoughts on this as I’m not even sure my maths is right let alone whether I want to live with bigger daily drawdowns in return for bigger overall returns.

Thanks in advance,

Terry