Liquidity Risk & Effective Leverage / Mish

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Forced Unwind Example
Assuming a hedge fund leveraged 4.0x (20% margin) were operating near or at maximum permissible leverage, the fund could be forced to sell as much as 25% of its assets in the event of an initial 5% price decline in the value of its assets.

Any collective, downward pressure on prices in the market arising from the hedge fund unwinding or an increase in margin requirements from the prime brokers would magnify the total amount of assets the fund is forced to sell. For example, an increase in the prime broker’s margin from 20% to 25% on average would require a fund to deleverage as much as 40% to meet its margin calls and restore leverage to within acceptable limits.