Finance 101

Short selling and leverage in Private Investment Portfolios

March 11, 2018


Short selling and leverage in Private Investment Portfolios

Finance 101

You are invested in a Private Investment Portfolio, which we are able to offer through Nicola Wealth Management (NWM). These are different from the ETF portfolios we offer.  

One difference: Private Investment Portfolios contain underlying funds that might use leverage and short selling (in amounts less than 10%). Why do we do this? To reduce volatility and enhance returns. 

It is very important for every investor to understand the risks of any investment, so we want to be completely transparent about the risks that come with short selling and leverage. 

Short selling risks 

Short selling means borrowing a security for the purpose of selling it, in anticipation that the price of the security will decline and the fund will be able to buy it back at a lower price in the future. This strategy allows the fund to profit when a security declines in value. Short selling involves the following risks: 

  • You have no assurance that the securities will decline in value during the period of the short sale sufficient to offset the interest paid and make a profit. In fact, securities that are sold short may instead appreciate in value.  
  • The fund may experience difficulties repurchasing and returning the borrowed securities if a liquid market for the securities does not exist.  
  • The lender from whom securities were borrowed may go bankrupt. In that case, the fund may lose the collateral it has deposited with the lender.  

Leverage risks 

Leverage means using borrowed money, derivative instruments or short selling to increase the fund’s potential return on invested capital. Leveraged investment strategies involve the following risks: 

  • While leverage is an investment technique that can magnify gains, it also magnifies losses. Consequently, any adverse change in the value or level of a leveraged investment will likely result in greater losses to the fund than if the investment were not leveraged. 
  • Losses on leveraged investments may be greater than the amount invested.  
  • Leverage may increase volatility. It may also impair a fund’s liquidity. This may cause the fund to liquidate positions at unfavourable times.  

How do WealthBar’s Private Investment Portfolios manage the risks of short selling and leveraging? 

We manage the risks of short selling and leverage by limiting the total exposure to such strategies to 10% of the Private Investment Portfolio.  

What is the historic performance of the Balanced Private Investment Portfolio which uses these strategies? 

This strategy offers a considerable risk-adjusted performance advantage when compared to the average Canadian balanced fund. 

Source: Morningstar Direct & Nicola Wealth Management  This chart shows the growth of $100 invested in the Balanced Private Investment Portfolio compared to a similar investment in a balanced mutual fund starting January 1, 2016. The Balanced Private Investment Portfolio holds the NWM Core Portfolio Fund and Balanced Mutual fund is the MorningStar Canada Fund Global Neutral Balanced Index. WealthBar’s portfolios’ performance is not guaranteed; its value can go down, up and change frequently. Past performance is not indicative of future returns. WealthBar Private Balanced performance results is presented net of fund management expense ratio. Management fees and expenses are associated with an account managed by WealthBar. 
A few minutes today could save you thousands tomorrow.
Start investing in under 5 minutes. No hold music. No paperwork.