No, I think we are absolutely talking about similar things. Portfolio Margin has everything to do with leverage. While your point about offsets is true, it's certainly not the entire story. A portfolio margin account will allow for up to 10 times leverage on some positions, and six times leverage on individual equities. Let's just focus on the leverage aspects: How is this any different than the leverage obtained through the allocator?
I didn't know we agreed to wager, and I'm not even sure I lost - but in the spirit of good sportsmanship I will pay you in the form of beer. Let me know next time you're around Lake Tahoe to collect.
Because it's a moot point to the conversation. All you need to know is, you put in 500k, they put in 4.5 million. Once the account is down 500k, you're done. How you trade is up to you. Leverage it up as much or as little as you want. They are not "giving" you leverage per se. They are giving you a 5 million dollar account of which 500k is yours. You can call it whatever you want. Trade it however you like. Once you are down 10%, your 500k is gone and the account is closed. That is the only thing you need to know. Portfolio margin is irrelevant.
Meh, I'm just having fun here. A mellow guy who likes taking the engine up to 7,000 RPMs now and then for shits and grins.
could someone please go over some of the examples further. how much of that great 9 to 1 return does the trader actually keep? if he is only getting 20% of that return, he is making the *exact same* as he was before, per the example, best case. $150-180k a year, still only a dentist, right? also, if/when that expected 6%-10% draw down happens, isn't the trader's money actually down that same 9 to 1, in a month? so, a somewhat expected bad -4% month puts his $500k down $200k, or off 40%, in one month, instead of the usual 4%, $20k hit he would have taken to his nut? i don't see how this is a better return that what this fantasy "36% per year 12% draw down" trader (using no leverage already? really?) could gain by simply getting a margin account for himself and working for 'only' 20% per year instead. without the hassles of worrying about that next (expected!) small draw down taking half his money in a few weeks. i'd rather pull out my teeth, and be my own dentist, than sweat the inevitable everyday ruining my equity. all while making a nice risk free nut for someone else. seems a step backward for that fantasy trader grinding it out year after year already with his own system.
Maverick, I honestly fail to see a more relevant and simple comparison. From a leverage perspective, Portfolio Margin is pretty much the exact same thing, except with a few more risk constraints.
Well, for one, portfolio margin will give you increased leverage only under certain circumstances - and they may not be the circumstances that are ideal for your strategy. Keep in mind too that, under certain concentrated position circumstances, portfolio margin will give you less leverage than Reg T. If you have allocator leverage, on the other hand, you can take your leverage up or down as you choose. So think of portfolio margin leverage as coming with all kinds of caveats - and for directional traders, the concentrated position caveat is a HUGE one. Let's say, for example, that a major, major macro event has just taken place. A discretionary trader is already up 20% for the year, having brilliantly played the secular bear decline. Now, in the flash of an instant, this trader sees that the entire game has changed... that the time has come to go "long the world," so to speak -- risking 500 basis points, or a quarter of his accumulated profits, to do so -- and he is able to do this with a very tight risk point, say in S&P futures, because of the epic inflection point that has just crystallized, allowing him to put on a HUGE amount of upside leverage in a very concentrated space. Our hero trader tries to go long S&P futures, all above considerations taken, with his portfolio margin account. The portfolio margin engine says "sorry, no dice - that's too much concentrated risk." One of the biggest opportunities of the year, maybe the decade, to make a sick killing has been cut short. Our hero trader makes a lot of money, but not NEARLY as much as he could have made, had he not been reined in by a robot. With allocator leverage, there would be no such automated restriction on concentrated positioning. Allocator leverage is thus not subject to one of the biggest flaws of treating portfolio margin as a source of leverage - the fact that concentrated positioning is not always a negative, depending on planned risk, situational dynamics, and other factors. And the same can apply in complex ways to more advanced market neutral type strategies, though the details are too hairy to come up with a quick example here... Bottom line being, portfolio margin leverage is not "true" leverage in that it is not "always available" leverage. It is subject to a pre-determined robotic formula, the calculations of which do not alway properly account for situational dynamics.
Jeeze Mav .... The discussion of leveraging my capital 100-to-1 was simply a exaggerated example I used to illustrate the concept and foster discussion. I wasn't suggesting this is a prudent strategy.