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I have a few questions for anyone here that has an account setup for portfolio margin or knows more about it. I'm familiar with the requirements to be considered. My question is how does it affect leverage if you are long $10000 in one equity instrument with an S&P500 beta of 1.0 and short $10000 in one equity instrument with an S&P500 beta of 1.0? In Reg-T, you can have up to 1.5 overnight portfolio leverage. What is the theoretical limit of leverage you can have if you are evenly beta-weighted on both the long and short sides?
Can you help answer these questions from other members on NexusFi?
It really depends on what you mean by "equity instrument" as the portfolio margin methodology stratifies assets into different groups and treats each group differently. For example, an S&P 500 ETF obtains different treatment than a MSCI EAFE ETF. The same goes for individual equities versus an index ETF for example.
The PM methodology does not take into account the Beta of the security, but rather, is based on pre-specified groups of securities that the OCC (the guys who cooked up the methodology) thought would make sense to group together. Needless to say it can get pretty complicated very quickly.
For a portfolio of equities (think individual companies like WMT, GE, MS, AAPL, etc.) this all becomes very simple as the OCC methodology does not allow for one equity position to offset a different equity position. So, say I have one long position and one short position in two highly correlated bank stocks. It doesn't matter. The OCC will not provide any preferential treatment based on correlation, beta or any other measure.
The one thing the methodology does provide is very low margin requirement even on individual stocks (and it gets lower for diversified indexes and ETFs). For equities, it's 15%, thus giving you the ability to leverage up over 5 to 1. In my Interactive Brokers account, I've had leverage well over 6 to 1 without any issues whatsoever.
Hope that answers your question.
Jason Apolee
The Margin Investor
PS. I've been using a portfolio margin account since 2009 and have a website dedicated to it.
