Leverage is Back! But This Time It's Different.

| Tue Jan. 22, 2013 1:56 PM EST

From the Wall Street Journal today:

Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees. Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios.

What could possibly go wrong? Apparently nothing. Proponents of this strategy say that their brand of leverage is nothing at all like that nasty old-school kind of leverage that produced a global economic crisis five years ago:

Money managers such as Bridgewater Associates, the world's largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns. Other proponents of this strategy, known as "risk parity," include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm.

....Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash...."Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,'' he said in an interview.

Uh huh. It's just a little bit of leverage. Trading is in large, liquid markets. Stocks and bonds always move in opposite directions. It's just common sense!

It simply astonishes me that, as near as I can tell, the rulers of our financial world learned exactly nothing from the events of 2008. They literally seem to believe that their actions had nothing to do with anything. The financial crash was just one of those black swans that nobody could have prevented. Next time we'll get it right.

No mattter how many fairy tales we tell ourselves, apparently we are all still just hairless apes and we are all idiots.

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