One of the most counterintuitive things about leverage is that being right eventually doesn’t guarantee survival today.
Imagine two £100 million funds holding the same assets.
\- Fund A holds £5 million in cash.
\- Fund B holds £20 million in cash.
\- Both suddenly face a £10 million margin or collateral demand.
Fund A must sell assets into a falling, illiquid market. Fund B can meet the demand with cash and keep its positions.
If prices later recover, both investment theses may have been correct but only one fund survived long enough to benefit.
That makes leverage partly a timing problem. Asset value answers, “Are you solvent?” Liquidity answers, “Can you meet today’s obligation?”
When analysing leverage, what matters most: the debt ratio, the cash buffer, or how quickly collateral demands can change?
Are there good examples where a liquidity shortage, not a fundamentally bad investment was the real cause of failure?