Key points
- Leverage multiplies gains in bull markets, amplifies losses in crashes.
- Margin calls force asset sales during downturns, creating downward spirals.
- Deleveraging can persist for years post-crisis (2008-2012).
Example
A hedge fund with $100M equity using 2x leverage ($200M assets) sees portfolio fall 20% ($40M loss); equity drops to $60M (40% drawdown).
In history
The 2008 financial crisis involved massive deleveraging: households, banks, and hedge funds forced to sell assets, cascading losses.
Related terms