Shmoop Finance

The beta of your portfolio of investments relates to how volatile that portfolio performs, relative to the overall market (the S&P 500).

Most hedge funds that live in a world measured by beta are, at times, extremely leveraged. That is, they have loads of debt on top of the equities they've purchased. So if a given portfolio was, say, 5:1 leverage, and it had $100 million of base equity, and that portfolio went up 10% with the market (i.e. they both went up 10% in 3 months), then the leveraged portfolio would have had $500 million total invested in the market, returning $50 million in gains...versus the levered $100 million, which would return just $10 million.

And yes, we're forgetting interest charges on that borrow. And yes, they'd likely be a lot. The idea is that, had the market gone the other direction, under all that leveraged-induced volume, the manager would be bust.

So levered and unlevered returns are calculated with the general vibe being that, if you have tons of leverage, you're adding gasoline to an already-smoldering fire. Hence, unlevered beta tries to put the risk gradients of all portfolios more or less on the same footing.