Can one reach 2x leverage on a mutual fund *indirectly*?

[BinaryAlgorithm]

IB specifically says:

"By regulation, brokers may not allow clients to purchase mutual funds on margin. However, once purchased and held as fully-paid for a period of 30 days, the mutual fund shares have loan value which may be used to extend margin credit against subsequent stock purchases."

The idea is to use my existing cash to buy the fund, wait 30 days, then that allows the fund to be used as collateral ("like cash") for an ETF transaction so then I short BIL for cash; now I have more cash to buy the fund (but have to remember the new purchase will not be treated like cash for 30 days), repeat multiple times to get to desired leverage of 1.7-1.8 on the fund; BIL cost of carry is about 1.6% + 0.7% short fee rate, lower than the 3.0% at IB right now (unless doing higher $ volume than I am) and anyways it seems like "direct" margining of the fund is impossible.

Since there is a time delay of 30 days, and the Risk Navigator doesn't seem to be able to handle the mutual fund properly, I'm not able to run the scenario so I am not sure if it could work or not. It seems like it would once the fund is considered as collateral. Perhaps there are other ways to achieve the same?

 

[BinaryAlgorithm]

This is an example how it could play out (max ratio for initiating positions 50%). Both BIL and IOFIX (the target fund) move in a very predictable way. Here I have started with 40k and then effectively "borrowed" $27.4k into the mutual fund without violating Reg T. at any time. In reality IOFIX appreciates and pays out monthly dividends that exceed BIL so the ratio would be falling over time.

 

[Scataphagos]

IB specifically says:

"By regulation, brokers may not allow clients to purchase mutual funds on margin. However, once purchased and held as fully-paid for a period of 30 days, the mutual fund shares have loan value which may be used to extend margin credit against subsequent stock purchases."

The idea is to use my existing cash to buy the fund, wait 30 days, then that allows the fund to be used as collateral ("like cash") for an ETF transaction so then I short BIL for cash; now I have more cash to buy the fund (but have to remember the new purchase will not be treated like cash for 30 days), repeat multiple times to get to desired leverage of 1.7-1.8 on the fund; BIL cost of carry is about 1.6% + 0.7% short fee rate, lower than the 3.0% at IB right now (unless doing higher $ volume than I am) and anyways it seems like "direct" margining of the fund is impossible.

Since there is a time delay of 30 days, and the Risk Navigator doesn't seem to be able to handle the mutual fund properly, I'm not able to run the scenario so I am not sure if it could work or not. It seems like it would once the fund is considered as collateral. Perhaps there are other ways to achieve the same?

20 years ago or so, you could buy MFs on margin initially. Used to do it all the time at Schwab.

Guess the revenooers figured to "save MF investors from themselves" and stoped the practice.

 

[Scataphagos]

IB specifically says:

"By regulation, brokers may not allow clients to purchase mutual funds on margin. However, once purchased and held as fully-paid for a period of 30 days, the mutual fund shares have loan value which may be used to extend margin credit against subsequent stock purchases."

The idea is to use my existing cash to buy the fund, wait 30 days, then that allows the fund to be used as collateral ("like cash") for an ETF transaction so then I short BIL for cash; now I have more cash to buy the fund (but have to remember the new purchase will not be treated like cash for 30 days), repeat multiple times to get to desired leverage of 1.7-1.8 on the fund; BIL cost of carry is about 1.6% + 0.7% short fee rate, lower than the 3.0% at IB right now (unless doing higher $ volume than I am) and anyways it seems like "direct" margining of the fund is impossible.

Since there is a time delay of 30 days, and the Risk Navigator doesn't seem to be able to handle the mutual fund properly, I'm not able to run the scenario so I am not sure if it could work or not. It seems like it would once the fund is considered as collateral. Perhaps there are other ways to achieve the same?

Unless you have a specific MF play in mind (other than specialty ones, few are going to outperform the S&P significantly), you can get leverage with "2x ETFs", and not have the same restrictions placed on mutual funds.

 

[MoreLeverage]

The idea is to use my existing cash to buy the fund, wait 30 days, then that allows the fund to be used as collateral ("like cash") for an ETF transaction so then I short BIL for cash; now I have more cash to buy the fund (but have to remember the new purchase will not be treated like cash for 30 days), repeat multiple times to get to desired leverage of 1.7-1.8 on the fund; BIL cost of carry is about 1.6% + 0.7% short fee rate, lower than the 3.0% at IB right now (unles

I guess you’re trying to do two things, get 1.75x leverage on a mutual fund, and engage in some financing maneuver to try to lower your margin cost? Because the easy thing would be to just wait 30 days, get 4x leverage on the first cash purchase, and now you can can buy another batch of the fund. I think the math might go like this -

$100 cash
Buy $100 of the fund
Wait
Fund now 25% requirement, $75 buying power
Buy $75 more of the fund
Wait
Get back about $56 in buying power

If the fund was for some reason more than the typical 25% IB requirement, you might need a 3rd purchase to reach 1.75x. Remember that shorting BIL will incur additional margin requirements so it may take longer to get the amount of margin freed up to make all your desired purchases.

 

[BinaryAlgorithm]

I guess you’re trying to do two things, get 1.75x leverage on a mutual fund, and engage in some financing maneuver to try to lower your margin cost? Because the easy thing would be to just wait 30 days, get 4x leverage on the first cash purchase, and now you can can buy another batch of the fund. I think the math might go like this -

$100 cash
Buy $100 of the fund
Wait
Fund now 25% requirement, $75 buying power
Buy $75 more of the fund
Wait
Get back about $56 in buying power

If the fund was for some reason more than the typical 25% IB requirement, you might need a 3rd purchase to reach 1.75x. Remember that shorting BIL will incur additional margin requirements so it may take longer to get the amount of margin freed up to make all your desired purchases.

The buying power during the day is different from the overnight rules of Reg T. If I understood the rules correctly, you also cannot buy funds on margin, it has to be from a positive cash balance. You have to be under 2x of any included assets (new funds purchases are not counted for 30 days) at EOD when you change anything and then holding the assets beyond the first day the margin requirement is reduced for long term holding.

 

[MoreLeverage]

Yeah, maybe for Reg T you can only get 2x overnight, I’m not sure. I think portfolio margin accounts might not have that restriction.

https://www.interactivebrokers.com/en/index.php?f=26663

Other non-PM retail brokers seem to give a 30% requirement with no additional overnight after 30 days, so maybe that’s not a real issue.

 

[BinaryAlgorithm]

Yeah, maybe for Reg T you can only get 2x overnight, I’m not sure. I think portfolio margin accounts might not have that restriction.

https://www.interactivebrokers.com/en/index.php?f=26663

Other non-PM retail brokers seem to give a 30% requirement with no additional overnight after 30 days, so maybe that’s not a real issue.

Yes - it's 50% on the first day and 30% after that, but I always look at the SMA which is the indicator for whether I can hold overnight (must be > 0). I can't use the numbers for margin in the IB dialogs because they assume 25% during the day.

On PM it's different, a lot more free (it's my eventual goal) - about 10:1 for BIL:

If you maxed out BIL then bought some of the fund, your margin goes up beyond liquidity which isn't allowed. I suspect it works similarly in that it adds 100% margin to the fund then it drops after holding for 30 days; even with PM you'd have to sell BIL and invest the cash incrementally to stay within limits, but your max leverage could go as high as 10:1 over time. The amount you can move at once is related to your initial cash, so you can invest about 10% per month of the target value. The easiest way to do it safely is to just sell 100 BIL at a time and buy the fund with that cash until margin is getting close to the limit, and then wait for the necessary time to do it again.

The max drawdown over the life of IOFIX (5 years) for NAV was under 3%, but 2% of that was related to dividend payments so the real drawdown on balance was under 1% (over 5 years!); it's safe even for a 10x leveraged investment but it also is returning 10-11% (!) which is why I want it so bad. It's neither stock nor bond related.

 

[BinaryAlgorithm]

I have run more calculations and the maximum leverage which the Reg T math allows is 1.5x no matter how many wait cycles are performed. For $15,000 initial cash, this occurs at $-7500 from BIL shorting, and $22,500 into the fund (post-30 days).

However, there is hope for PM accounts https://www.finra.org/rules-guidance/key-topics/portfolio-margin/faq : "Money market mutual funds have a margin requirement of 1 percent; other open-ended funds require 15 percent."

However, this applies to equity-based funds; I am not sure with this fund what ratio is applied since it has no stock component, but is less volatile than the market. BIL itself as a low-vol treasury ETF has a risk-based margin of a little under 10%.

Below is how it could be done in a PM account assuming 15% (post-30 days) and 10% (BIL) margin values:

Extrapolating the trend, I believe 3x leverage is relatively easy and 4.4x leverage is the hard mathematical limit (unobtainable) in a PM account given sufficient time.

 

[MoreLeverage]

I think you might need to revisit your idea about shorting BIL for financing. See here:

https://www.interactivebrokers.com/en/index.php?f=interest&p=secfinancing

Basically your “short credit balance” (ie proceeds from short sales) is a different thing than cash, does NOT net against your margin borrowing, and pays interest at a different rate. So if you’re long $2 of your fund and short $1 of BIL, you’re paying full margin rates on $2 and earning lower cash rates (zero below $100k USD) on $1 of short credit. Plus you have additional margin requirements for the BIL short and additional short borrowing costs too.