LeverageStart here

Borrowed money does not change what an asset earns. It changes who gets the earnings, how fast the loss arrives, and whether you are still there when the view comes good.

One idea, four disguises

Leverage is any arrangement where the money at risk is larger than the money you put up. That is the whole definition, and it is why the same arithmetic shows up in places that look nothing alike:

• Borrowed leverage — a repo, a securities-backed loan, a mortgage. Explicit interest, explicit collateral, explicit call.
• Embedded leverage — an option, a warrant, a turbo. No loan is signed; the gearing is inside the payoff, and the financing cost is inside the price.
• Notional leverage — a future, a CFD, a swap. You control a notional many times your margin, and the exposure is what matters, not the deposit.
• Structural leverage — a bank, a REIT, a securitisation tranche, a levered fund. You bought equity in something that is itself geared, so your gearing is the product of the two.

Reading a portfolio for leverage means adding all four up. Most people who believe they hold none hold the last two.

The arithmetic, and the cost that comes before the return

Put up 1 of equity, hold L of assets, borrow L − 1 at rate b, and pay a fee f on the assets:

Two consequences follow immediately, and both are routinely missed:

• The asset must clear the loan before you earn anything. At 3× and 5% borrowing, the asset has to return about 3.3% a year just to leave your equity flat. Leverage does not multiply a positive expectation; it multiplies the excess of the asset return over its financing cost, and that excess can be negative for years.
• Gearing on the way up is not the gearing on the way down. The multiple is stated on the exposure, but your equity shrinks as you lose — so the same 3× position is 4× or 5× geared by the time it is hurting, unless something forces it back.

Why the path beats the destination

• An unlevered holder can be wrong for a while. A levered one cannot: the margin call arrives on a date, in cash, regardless of what the position is worth at maturity. Being right eventually is not a defence against being liquidated on Tuesday.
• Daily-rebalanced leverage decays in choppy markets. A product that promises "3× the daily move" resets its gearing every close, so it compounds the sequence of returns, not their sum. Flat-but-volatile markets bleed it. The decay calculator makes the size of that visible.
• Volatility itself is a cost. Two assets with the same average return but different volatility do not compound to the same place, and leverage widens the gap it is applied to. This is why professional levered strategies size to a volatility target rather than a fixed multiple.
• Correlation is the hidden multiplier. Ten levered positions that all depend on the same funding market are one levered position. LTCM held dozens of trades and one bet.

Where leverage hides in ordinary holdings

• Your house, if there is a mortgage on it, is usually the most levered position a household will ever hold — 5× or more at the start, on a single, illiquid, undiversified asset.
• Bank shares are equity in a balance sheet geared ten or twenty times. That is not a criticism; it is the business. It does mean the share is a leveraged claim on credit conditions, not a plain company.
• Long-dated bonds carry duration, which is leverage on the interest rate: a 20-year bond moves like a much larger position in a short one. See bond math.
• Options bought "because the loss is capped" are geared several hundred percent at the moment of purchase. The cap is real; the gearing is real too, and the elasticity calculator prices it.
• Private funds report returns on drawn capital while running a subscription line, which flatters the IRR without changing a single underlying cash flow. The IRR page takes that apart.

Questions that survive contact with a real position

• What has to be true for the financing to still be there? Leverage is a contract with a lender who can change their mind — through a haircut, a rate, or a refusal to roll.
• What is the largest move I can fund, not the largest I expect? These are different numbers, and only the first one keeps you in the trade.
• What is my leverage after I have lost a third? That is the gearing that decides the outcome, not the one on the term sheet.
• Would I hold this unlevered? If the answer is no, the leverage is doing the arguing, and the underlying view is thinner than it looks.