A Tiny Hedge Fund Made 8,600% on a Vix Bet

If you have programming skill and a good understanding of statistics, do the following:

1. Identify a subset of equities in the total market which a) have fairly one dimensional revenue streams, b) have a market capitalization of at least ~$1-2B, and c) are not prone to extraordinary hype or tech-centric accounting, such that e.g. a "win" or a "loss" in an earnings announcement is fairly straightforward to understand (and therefore you can more easily, if not perfectly predict how the market will react).

2. Identify a strong, legal source of alternative data that maps directly to the revenue stream of one of these companies. The more difficult to find and collect, the better. Use your programming skills to automate the collection and curation of this dataset.

3. Incubate your dataset for a period of several months, then build it into a timeseries. Using the timeseries, build a model that forecasts the expected revenue of each particular company using historical 10-K and 10-Q documents.

4. For the companies whose data imply a jump in either direction that is very unexpected (according to e.g. the aggregate analyst consensus), take a contrarian position in the equity. If you're feeling very confident and have a higher risk tolerance, study options and take the corresponding derivative position.

5. In particular, establish a target win rate overall, a target tolerable drawdown period overall, and a target exit price (sufficient win or bearable loss) for each position, then follow it.

If you do this correctly and consistently, you will profit significantly and consistently enough that your system will be fully distinguishable from uninformed gambling. To equip you with a bit of meta-analysis here, this outline works because a) all trading strategies profit from finding opportunities to exploit pricing inefficiencies in various securities (or groups thereof), and b) the only way to deliberately identify those opportunities is by having information, access, or techniques that the broader market does not have yet (or else the price would reflect that information).

The great difficulty in this process is finding and analyzing the alternative data in the first place. As a fallback, if you're not confident you can build a trading strategy with this data you can also sell it to hedge funds, who will be very happy to buy it if it actually maps to revenue and is otherwise unknown.

The Options Clearing Corporation [1] actually has a solid set of introductory courses [2]. That said, I am very conservative about when I believe individual investors should be trading options. (With surplus investment capital, i.e. after tax-advantaged retirement accounts and liquidity reserves have been maxed out, and principally for purposes of hedging (versus leverage).

[1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation

[2] https://www.theocc.com/education/

What's interesting about this fund's particular bet isn't that they we're _right_ about the market but they correctly bet that the structural ability of the ETN/ETF product to properly hedge the risk associated with the fund goals was either too difficult or in certain events literally impossible. And that a certain event (like even what most would consider right now as a regular correction) would blow up said fund. In fact, even bastard cousins of the fund that are meant to do the exact opposite thing in these conditions may also feel the same deathknell (https://finance.google.com/finance?q=xiv).

And just to look a little deeper into the bet itself... They were using options (derivatives) on a fund (a derivative) using swaps (derivatives) linked to the VIX (a derivative) which is a measure of volatility of an index (a derivative) of the S&P components.

You too can replicate these winnings by just finding a niche mis-pricing on a derivative of a derivative of a derivative of a derivative of a derivative of a derivative!