Got it. Convincing. And borne out by Morningstar, whose portfolio analyses tend to go crazy on this kind of thing...lack_ey wrote:Here, it's basically a huge pile of cash and little actual assets.... So the bulk of the fund is a large cash pile with money getting added or taken away from the pile every day based on whatever the performance of the underlying securities was... The fund just needs to go to its huge cash pile to meet redemptions.nisiprius wrote:How liquid are the assets held by leveraged long-short funds? What are those assets, exactly, and can they readily be sold quickly to meet redemptions, should the need arise?
I'll take that on faith.And then close some contracts at the market price to adjust the leverage back to the target when convenient. If futures prices diverge considerably from the underlying securities, that's a big risk-free arbitrage opportunity for somebody. Maybe it happens. But the fund isn't obligated to open and close positions ASAP and could ride out some funny behavior unless all its positions were blowing up and its hand was forced.
So, the risks of the long-short leveraged portfolio are whatever they are, but the risks of "run on the fund" (the thing that happened to Third Avenue Focused Credit and that regulators worry about in less-liquid bond funds)--the fund would be solvent if only everyone wasn't demanding redemption at the same time--are minimal.