“You use leverage, don't you?” If I had a dollar for every time I have heard some version of that question over the past five years…well, I would not be writing this. I would be in a vineyard in Italy, retired.
When most investors hear the word leverage, they think about risk. And in fairness, in the wrong hands, leverage is dangerous. We have all heard of the spectacular blowups: Long-Term Capital Management, Bear Stearns, Lehman Brothers, the US Housing Market. And that is just in my time in the markets.
We never hear about the firms that use leverage thoughtfully, because those firms do not fit the old media adage: if it bleeds, it leads.
At Potomac, we believe that the real risk is not leverage. The real risk is exposure.
Being fully invested all the time, regardless of market environment, is the real risk. Markets do not care about your mandate or your conviction. Just ask the team at Situational Awareness who added leverage to a high conviction thesis on highly correlated stocks.
At Potomac, we run our Bull Bear strategy at roughly 1.5 beta to the S&P 500 when and only when conditions are favorable.
That tactical leverage is what allows us to stay in cash, roughly 40% of trading days, when the risk/reward profile is not compelling.
Honestly, we prefer to be in cash until the market proves to us that it deserves our client's capital.
The leverage is not the risk. The leverage is what makes risk reduction possible.
That sounds backwards until you look at the numbers.
No Leverage, More Risk
Let's look at Bull Bear compared to two other strategies. One makes concentrated bets on “innovation.” The other makes concentrated bets after doing very deep and thorough fundamental analysis. Neither “use leverage.”
The table below compares Bull Bear, the ARK Innovation ETF (ARKK), and the Polen Growth Fund (POLIX). We also include the S&P 500. All calculations begin from the common inception date of October 31, 2014. Bull Bear is shown net of a 2.5% annual fee.
The ARK Innovation ETF is a well-known strategy focused on “innovation.” It is widely available to most investors.
It has run at a 1.74 beta to the S&P 500 since inception. This is an example of a fund that does not use leverage, so it may not be considered “risky” in the eyes of some allocators. However, it is not the leverage, or lack thereof, that matters. It is exposure. If the S&P 500 falls 1%, we can reasonably expect the fund to decline ~1.74%.
The Polen Growth Fund runs a concentrated portfolio of stocks on which their analysts have done deep fundamental research. The fund is widely available on platforms where financial advisors access outside managers, including our own Union TAMP.
Despite that deep analysis, the fund has generated lower returns than the S&P 500 with a deeper drawdown.
Now, look at Bull Bear, despite “using leverage” the strategy runs at a beta of 0.50. The strategy produces competitive returns (net of fees) while exposing investors to a much lower drawdown than the other two investments.
Common Inception Comparison (October 31, 2014– June 30, 2026)*
Metric | Bull Bear (Net) | ARKK | POLIX | S&P 500 TR |
|---|---|---|---|---|
CAGR | 11.80% | 13.45% | 11.05% | 13.89% |
Max Drawdown | -21.69% | -77.08% | -39.05% | -23.87% |
Volatility | 14.57% | 35.82% | 17.34% | 14.99% |
Beta | 0.50 | 1.74 | 1.04 | 1.00 |
Correlation | 0.51 | 0.73 | 0.90 | 1.00 |
CAR/MaxDD | 0.54 | 0.17 | 0.28 | 0.58 |
Three numbers stand out immediately. Bull Bear produced the shallowest drawdown, the lowest beta, and the lowest correlation.
In plain English, Bull Bear produces a higher reward/risk ratio when using max drawdown as the risk metric. Why max drawdown? Because that is “the ride you take.”
Note too, that the strategy that “uses leverage” has a much lower beta than the other two. If we think of beta as exposure to the market, ARKK is more than 3x the exposure of Bull Bear while POLIX is more than double. If you prefer to look at volatility, only Bull Bear has a lower vol than the S&P 500.
But we still get the question from allocators, “you use leverage, don't you?”
One, Three, and Ten-Year Metrics
As we can see in the table below, across the time frames by which many strategies are measured, the strategy that uses leverage to obtain a lower exposure also delivers compelling returns
For the Period Ending 06/30/2026
Strategy | 1-Year¹ | 5-Year | 10-Year |
|---|---|---|---|
Bull Bear (Net)² | 30.09% | 11.17% | 13.32% |
ARKK | 14.98% | -9.03% | 16.25% |
POLIX | -10.45% | -0.35% | 11.30% |
S&P 500 TR | 22.32% | 13.41% | 15.51% |
[1] The one-year figure is a single-period total return; the five- and ten-year figures are annualized (geometric) total returns. [2] Net of a 2.5% annual model advisory fee applied monthly. ARKK (ARK Innovation ETF) and POLIX (Polen Growth Fund) are third-party funds shown solely for comparison and are neither managed by nor affiliated with Potomac. An index cannot be invested in directly.
The Bottom Line
Max drawdown is what clients live through. A -77% decline needs 336% to recover. A -39% decline needs 64%. A -22% decline needs 28%.
Bull Bear's leverage is not used to juice returns. It is there to lower the beta. It is there to lower the max drawdown. It is there to make the ride less volatile
The real risk was never leverage. The real risk was always exposure.
Used thoughtfully, leverage can lower risk!
