Despite what many investors seem to believe today, leverage isn't necessarily a bad concept according to an expert panel of portfolio managers who focus on private fixed-income.
The Executive Alternative Investment Management Association (EAIMA) recently hosted a panel discussion on generating yield in today's market environment. While many investors may be uncomfortable with the idea of leverage, it is a necessary investment strategy if they want to find sufficient yield in fixed-income, according to the panel. For example, due to persistently low interest rates, an un-leveraged investment in a high-grade bond will not generate any yield.
When investors avoid a leveraged investment out of fear, they are missing the bigger picture. "The notion of leverage or derivatives having a negative impact on the financial markets is the wrong idea," said Jayson Kim, a portfolio manager for the AIG Risk Equity Capital.
As well, when it comes to hedge funds, current market conditions mean that the amount of leverage used for an investment strategy is far less than in previous years. Of course, there are times when using leverage is not a good idea. "Leverage can be dangerous if it is not constant and isn't monitored appropriately," said Kim. In order to manage the risk, he said, it's important that investors are able to track the leverage used in a fund.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.