Trading with borrowed funds

[qlai]

just think it might be an interesting discussion, to hear different views...

I would only take it if I were:
1) consistently profitable in different market regimes
2) my trading can be easily scalable to utilize the loan

I would say up to 10%. If you can’t make at least that, no point trading.

My friend asked me once if I would consider trading his money and I said : “Until I can trade consistently, I can’t take your money. Once I trade consistently, I don’t want your money.” There are exceptions to that, but for most non-professional traders, I would be interested to hear why this doesn’t hold true.

 

[jnbadger]

Those are interesting thoughts... but you didn't really answer the question.

Assume for this discussion that the loan is a legit unsecured loan from a bank--not a loan shark, not a credit card cash advance, structured like a mortgage, fixed rate, equal payments over 30 years.

How low of an interest rate would you need to be comfortable taking the loan and trading with the money?

Maybe your answer is that you would never be comfortable doing this, even if the interest rate was zero. And that's a fair answer.

I am guessing you are where I was many years ago. You are making assumptions about your future returns based on back testing or looking at past charts. Don't borrow money to trade. It is seriously a stupid fucking thing to do.

 

[TheDawn]

This is not a question about margin.

I am not structuring this as a survey or quiz, but I just think it might be an interesting discussion, to hear different views...

If you could get an unsecured loan from a bank or some other lender--not a mortgage loan, but rather an unsecured loan that is structured a lot like a mortgage loan, e.g., monthly payments amortized over 20 or 30 years...

• How low would the interest rate have to be for you to be comfortable taking such a loan and using the money to trade?

• How much would you borrow?

You may assume for this discussion that even though it is not a mortgage loan, you are nevertheless personally liable for repayment, and that you have some meaningful assets that would be subject to garnishment or attachment if you default on the loan.

You may also assume that the loan is a genuine arms-length transaction from a disinterested lender, i.e., you are not borrowing the money from your brother-in-law, or any other type of arrangement that would create risk to family relationships, or other hard-to-quantify risks or variables.

You should only borrow funds to invest *if* the return rate that you are able to earn on the borrowed funds is higher than the borrowing rate tax-adjusted, otherwise it's not worth it. There is no such thing as a "comfortable rate"; everything depends on how much you can make on what you invest with the borrowed funds. If the interest rate on the loan is 10% but if you are able to make 15% on the investment that you made with the funds from the loan, then that 10% is a comfortable rate for you. But even if the interest rate on the loan is 5% but if you are only able to make 2% on the investment that you made with the funds from the loan, then that 5% interest rate on the loan is not a rate that you should be comfortable with.

 

[MoreLeverage]

Of course you can game this type of thing in theory by borrowing at some huge LTV with respect to your assets and YOLO’ing it on GME weekly calls or something and going bust by a lot if it doesn’t work out.

More practically, it depends on your returns and your consistency of course, as well as what the market will bear in terms of lending rates to a trader on an unsecured basis, 8-10% maybe? Whether or not they can call their loan back on short notice or not is a big factor in whether you can invest through a crash for example. Non-callable is worth a fair bit IMO, several % premium I would think.

these days 30 year fixed is looking like a free flier on high inflation as long as you invest in anything real (stocks, RE, commodities), so 3-4% seems like an easy choice to take. Higher gets harder depending on your skill.

all that said, I would probably not go more than 2-3x leverage from this loan, just to avoid drawdown risks or blowing up. I once paid double digit rates in such a situation, when I was more optimistic and less solvent. Now I would probably pay half that.

 

[sridhga]

Some hedge funds are already doing this. Otherwise why did easy money (printed money) prop up the market during the pandemic?

 

[sridhga]

This is not a question about margin.

I am not structuring this as a survey or quiz, but I just think it might be an interesting discussion, to hear different views...

If you could get an unsecured loan from a bank or some other lender--not a mortgage loan, but rather an unsecured loan that is structured a lot like a mortgage loan, e.g., monthly payments amortized over 20 or 30 years...

• How low would the interest rate have to be for you to be comfortable taking such a loan and using the money to trade?

• How much would you borrow?

You may assume for this discussion that even though it is not a mortgage loan, you are nevertheless personally liable for repayment, and that you have some meaningful assets that would be subject to garnishment or attachment if you default on the loan.

You may also assume that the loan is a genuine arms-length transaction from a disinterested lender, i.e., you are not borrowing the money from your brother-in-law, or any other type of arrangement that would create risk to family relationships, or other hard-to-quantify risks or variables.

I did borrow to trade sometimes. I paid like 12% interest per year. These interest rates are common in my country. Yes if you are a dedicated trader and you have a strategy, you can win and survive this. I also did this when I had no other source of income other than trading income. In USD terms, I borrowed like about 1300 USD. Repayment period was 30 months with equated instalments. I also had about 5000 USD of my own trading fund in addition to this at the time. I traded using these funds every day.

 

[wmwmw]

I don't see the difference between this kind of loan and a high leverage.
For borrowed money,in essence they are the same. If you are consistent profitable,leverage is much more convenient and useful.
If you are not consistent profitable,leverage is also better, because it only impact your trading account,not your life.

 

[nooby_mcnoob]

Once I trade consistently, I don’t want your money.” There are exceptions to that, but for most non-professional traders, I would be interested to hear why this doesn’t hold true.

For me, I feel like I want my friends and family to benefit from my success.

Fortunately, my family are thieving, lying dickheads and my friends are already successful on their own.

So it's all mine!

 

[cruisecontrol]

My friend asked me once if I would consider trading his money and I said : “Until I can trade consistently, I can’t take your money. Once I trade consistently, I don’t want your money.” There are exceptions to that, but for most non-professional traders, I would be interested to hear why this doesn’t hold true.

If you can trade consistently then roughly speaking your goal should be to grow your capital until you've exhausted all the capacity of your edge.

As long as you haven't reached that point yet, borrowing more to trade could be considered. You'll need to trade off the rate of growth with risk when you determine how much leverage to use. Fortunately, drawdown size can often sub-linear in leverage when you have a system that can be more diversified when you have more capital.

 

[qlai]

You are correct assuming that your goal is to maximize amount of money you can make. There are lots of talented traders who tried to manage OPM and the aggravation was not worth it for them personally.