Bill Ackman aims for leveraged exchange-traded funds (ETFs) and zero-day options. These financial tools have become popular among day traders. In a series of posts, the billionaire investor criticized the heavy use of leverage in markets.
He asked his followers how these instruments have advanced society or contributed to the economy. Levered funds allow investors to magnify their exposure to an asset or index. They are typically meant for short-term trading.
According to Bloomberg data, these funds command around $100 billion. They have been a favorite among traders hoping to profit from recent wild swings in stocks. Zero-day options are contracts that expire within 24 hours.
They have also exploded in popularity. Some investors say they can make volatility worse in broader equity markets.
Ackman questions financial tools’ impact
Ackman wrote that such instruments could threaten the health of financial markets. He said the heavy use of leverage is “driving dramatic market moves.” It has made markets “increasingly unreliable as short-term indicators of the impact of policy changes.”
I don’t understand how it is good for the world to allow investors in equities to operate with 10-1 leverage,” Ackman wrote. He also questioned allowing investors in Treasurys and currencies to operate with 100-1 leverage.
Ackman isn’t the first to criticize the highly volatile class of ETFs. Recent moves in some of the funds have supported their critics’ views. Two levered funds focused on the cryptocurrency Ether are among the biggest losers this year, with declines of more than 80% each.
Others argue that investors tend to understand the risks they’re taking with these instruments. They say investors can bet on things they think will help them make a quick profit. “As a libertarian, I’d hate to see regulators try to ‘protect’ investors from themselves by tightening the screws on these powerful tools,” Rob Arnott of Research Affiliates recently told Bloomberg.
“They’re wonderful for those who want to make big short-term bets. It’s not so great for the buy-and-hold investor. And not bad for the short-and-hold investor.”
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