The personal hedge fund

Einstein said that one of the greatest mathematical discoveries of all time is the compound interest, I agree plenty. But did you notice that he said mathematical discoveries and not financial discoveries? That is because the greatest financial discoveries of all time is debt! I will refer to debt from now with a more common jargon uttered by the financial types as leverage. Debt has so much negative intonation that comes with it.

Leverage, when used wisely to invest, is the shortest path to success. The application of debt has to be based on your income stream, the theory of which I will leave to another day. Suffice to say that at certain point of debt load with certain interest, you will not be able to pay down the principle at all. That breaking point has to be established before you try anything wild. My advice is to start small, but I want to move on and jump straight to over leverage.

DISCLAIMER: I am not a financial adviser and I DO NOT recommend taking any of the statements below seriously. YOU WILL BE RUINED if you try it.

100% leverage

I want to theoretically go over a certain death way of managing your investment. A way to gamble it all and have a do or die moment in your life. Through all this running around and raising funds, I’ve become increasingly aware of just how easy it is to get money. As long as you have a job, you can usually leverage up to 100% of your annual income. Let’s take $50,000 as an average because it is a easy and rounded number to use. The first step to start a personal hedge fund with excessive leverage is to go to your bank and get a line of credit. While at the same time, send out application to several credit cards with locked in cash advance interest period (at around 2%). The reason why you want to do this is so that they all perform a credit check on you while your profile is still on the most pristine of all conditions. Once you got approved, your risk profile increases and each subsequent request for credit score will net you less money.

So in the event you are able to do this well, you will get: $50,000. Add that to all your income, assuming that you are leeching off your parents still and you get $100,000 in a year. Now, you will want  to do this fund raising potentially during an economic crisis so that the interest rate is low and easy to pay off. I find it still tolerable at around 5%, but 6% is a bit too much. Health care professional gets a rate at prime (I recommend becoming a chiropractor or pediatrician. Easy to get into and same benefit). Engineers and financial pros gets prime + 1. Now that you have done this, you are at 100% leverage.

400% leverage

The next step is a easy part. The brokerage are usually disconnected from banks and gives you a certain amount of leverage if you request for a margin account. They then adjust the amount based on how successful you are at trading, but suffice to say that they give you double your equity to begin with. So once you deposited your $100,000, you get $200,000 of buying power. I personally recommend skipping this step. Margins are the wild card in investing since you lose all control when your broker does a margin call on you and force sell your stocks. Compounding the pain.

1200% leverage

There are funds out there that moves at 3x the movements of a given sector. Buy these ETF and you immediately triple the previous leverage. You increased your potential money power to $600,000

12000% leverage

With options on these type of funds, you enter into a different realm. I used a simple formula of 10x whatever purchasing power you have. Real options give you more leverage than that, but for simplicity’s sake, let’s just use 10x . So now you have $6 million of purchasing power on your hand.

1% movement

Now here’s the kicker. Remember that your real capital is only $50,000? Well, guess what? It still is. A 1% move up will double your money, but at the same time, a 1% move down will deplete all your cash reserve. With every 1% decline, you lose 2 year of your life at paying back the debt. So you can potentially only sustain a 30% decline before your whole life is meaningless. That’s not even including the interest payments. The S&P suffered a 50% decline since its peak, now do you understand why certain individuals feel the need to kill themselves?

DISCLAIMER: All this is theoretical and has not been attempted. Individually yes, but not as whole process. I DO recommend using this if you are an idiot or wish to ruin yourself.