Huge amounts of non-recourse leverage possible?

[cashisking]

Sell long dated in the money puts (on companies you expect to increase in value) and calls (on etfs and companies expected to decrease in value). Use that to buy long dated warrants - ones where the implicit cost of borrowing is low. Look for warrants that just start to trade - some experience a spin off effect and get dumped. Post reorg warrants are the sweet spot IMO - all the benefits of post reorg valuation, fresh start accounting etc for the underlying company, and the holders are usually former retail equity holders and debt holders (neither are too interested in holding the warrants that represent pennies on the dollar of their original capital)...

 

For selling naked puts and calls you are going to need margin. In canada we have TFSA account types (similar to Roth IRA in US) and Questrade has a feature that allows you to use your tfsa assets as collateral for your margin account at no cost. So there is no cash cost for borrowing the margin needed to hold short option positions if you set it up that way.

 

I guess buying CEFs at a discount to NAV is a form of borrowing. You get the discount at no cost and its non recourse to you. The discount can multiply if the CEF holds assets that themselves are discounted (I'm thinking of a bond CEF at a discount and the underlying bonds are trading at a discount to par for some technical reason).

[bizaro86]

Another potential way to add a bunch of leverage is through split shares. Basically, these are retail yield pig vehicles. They start with a $25 NAV, split between a $10 preferred share and a $15 common share. The prefs get a preferred dividend, and the common gets a levered play on the underlying portfolio. They tend to overdistribute on the common, so the NAV often decreases. But that just makes them even more levered.

 

As an example: TSX:FFN is a portfolio of 15 US/Canadian financials. Largest positions are BofA, JPM, WFC, and GS (in order) so potentially attractive valuations.

 

The NAV in total is ~$16, so the NAV to the common is ~$6. The common trades at $6.26 CAD, so you're paying something for the leverage. They distribute $1.20 to the common per year (until they bottom out at whatever the NAV minimum is). This is close to 3 to 1 leverage on a diversified portfolio of financials at relatively low cost.