what does "p&l leak " refer to in finance?

Question

I have saw "p&l leak" in book/paper more than once, especially when talking about hedging, etc. what does "p&l leak" exactly refer to? Thanks

Answer 1

It is the systematic "L" in P&L (not the "P") that is small enough not to be noticed day to day, but happens often enough to add up over time to a material loss. Possible examples include

financing cost of a cash position (often ignored)

effects of second (and even higher) order risks

bid-ask, when you assume you can trade at mid; or wider than expected when you planned your dynamic hedge.

higher realized volatility than expected when you planned your dynamic hedge.

Having a "P&L explain" tool that takes into account P&L sources that don't look very material, and leaving very little unexplained P&L, is a good way to find the leaks.