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Jon B's avatar

I just want to confirm and clarify something. You say that "appreciation in long positions boosts portfolio equity and margin capacity". If your short book goes up by an equal amount, and holding all things equal that seems like a safe assumption, you don't gain any margin capacity.

If your account has 100K in equity, you are 130 long / 30 short. Let's say the market then doubles. You are now 260 long / 60 short, with 200 in equity, but you didn't gain any margin capacity. Your leverage was 1.6x before the rise in the market, and it's 1.6x after the rise in the market. You can obviously harvest losses in those short positions, but it's not quite the same as an injection in cash, right?

Now if you are using factor overlays, and those factor overlays generate alpha, that DOES create more margin capacity. So if you were 130 long / 30 short, and your factor overlay (let's say long value) generates 10% alpha (using a ludicrously large number for this example), and you are now 135 / 25 short, your leverage went from 1.6x to 1.45x, and you can now lever back up to 1.6x with what is essentially 'new cash'.

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