Same Leverage, Less Volatility: An Alternative Approach to the Construction of Leveraged Funds

Abstract

This article introduces the concept of variable leverage for exchange-traded funds while keeping in mind that the target value for the leverage value is still fixed. This is done to ensure that the daily percentage hedging demand is kept constant, which in turn provides some assurance to investors that excessive buying and selling will not take place. By using simulations, the authors show that this newly constructed leveraged fund is better behaved than the usual constant multiple leveraged fund in terms of standard deviations and volatility of compounded returns.