Short Selling and Leverage in CI Direct Investing Portfolios
In addition to our ETF Portfolios, we also manage a variety of other portfolios, some of which may include funds that use leverage and short selling. A key difference is that these 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‘s important for investors to understand the risks of their investments, so we want to be completely transparent about the risks that come with short selling and leverage.
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.
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.
How does CI Direct Investing manage the risks of short selling and leveraging
We manage the risks of leverage and short selling by limiting the total exposure to these strategies to 10% of the portfolio.