Leverage and Costs
A general partner or any managed account client can choose greater leverage than what an advisor's minimum account size requires. General Partners assume all liability. Limited partners have no risk from any losses beyond their initial capital contribution plus distributions paid back. Managed account clients assume their own liability.
The chart above shows $1000 Unit value of money from January 1999 through January 2005, traded at three degrees of leverage. Single, double and triple monthly return data was applied to a $1000 Vami Index. Returns are net of clearing and advisor costs, yet before General Partner or Sanctity fees. THE MODEL IS HYPOTHETICAL AND ONLY DEMONSTRATES THE POWER OF LEVERAGE.
Definitions
Nominal Value - The advisors minimum fully funded account size or actual trading designation. For example. $300,000 actual cash is traded at 3.33X leverage or $1 Million. The Notional, Nominal or designated value is $1 Million, or the advisors minimum or billing account size. (Advisor management fees are billing on this account size.)
Actual Funding - Cash committed to trading by the client. Funds that a client agrees can be transferred from another account are included.
When building investments, costs are ALWAYS evaluated within the composite investment and VALUE ADDED frame of reference. Costs are evaluated in context with:
Cost Considerations
| COSTS AT VARIOUS FUNDING LEVELS | ||||
| Leverage Used | Funded Value | Fees | Fees | Fees |
| Fully Funded | $1,000,000 | 4% | 5% | 7% |
| 2X Leverage | $500,000 | 8% | 10% | 14% |
| 3X Leverage | $333,000 | 12% | 15% | 21% |
The table above represents hypothetical fees charged to any partnership. Incentive fees are not included because they are not a fixed cost. Incentive fee calculations are usually in the break-even analysis of any partnership document.
Advisors may bill management fees on a fully funded account value. We believe management fees should be paid based on the leverage chosen by the client.
Cost and Return
Cost can only be considered relative to the context of risk and potential return. We live in a world of relationships. Science teaches us that nothing in the universe is accurately evaluated in isolation, let alone your investment.
| RETURNS AT VARIOUS FUNDING LEVELS | ||
| 100% Funded | 50% 2X | 33% 3X L |
| 40% | 80% | 120% |
| 30% | 60% | 90% |
| 20% | 40% | 60% |
| 10% | 20% | 30% |
| -10% | -20% | -30% |
| -15% | -30% | -45% |
| -20% | -40% | -60% |
| -25% | -50% | -75% |
- Cost relative to return based on capital at risk relative to the account size required by the advisor.
- Evaluate client comfort, marketing, risk of loss, risk of unwanted compliance issues, right use of time.
- Margin requirements needed to achieve potential returns at fully funded values.
- Draw downs, strategy, time value and margin are used to determine the appropriate leverage to use.
- Draw down, actual margin risk relative to NET return for the client AT the degree of leverage chosen.
- Costs are evaluated as a ratio relative to return on capital at risk, rather than the account size.
- http://analysis.safemoneymetrics.com
Link to analyze your costs relative to capital at risk and return
