Short selling and leverage in Private Investment Portfolios
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 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.This chart illustrates the hypothetical 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. The performance is displayed in Canadian dollars and assumes daily rebalancing and the reinvestment of distributions. It is reflective of the model portfolio’s target holdings and weights including portfolio changes. The performance is net of the management expense ratios (MERs); however, does not include WealthBar’s management fee or taxes. Balanced Mutual fund is the MorningStar Canada Fund Global Neutral Balanced Index fund and includes the fund MER. This performance may differ from clients’ actual account return due to the timing of deposits, withdrawals, buys and sells, and the reinvestment of distributions. Source: Morningstar Direct & Nicola Wealth Management. Any performance provided is for informational purposes only and is not to be considered as investment advice. WealthBar’s portfolios’ performance is not guaranteed; its value can go down, up and change frequently. Past performance is not indicative of future returns.
From September 2013 to January 2019 Nicola Wealth was a related party of WealthBar.