A Tiny Hedge Fund Made 8,600% on a Vix Bet
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A Tiny Hedge Fund Made 8,600% on a Vix Bet
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Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#2The probabilities of black swan events are often grossly mispriced by the markets. Looks like it paid off big time.
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#3The probabilities of black swan events are often grossly mispriced by the markets. Looks like it paid off big time.
The questions typically are (1) Can you find an instrument that lets you bet on the mispricing (2) do you have the wherewithal to stay solvent for the arbitrary period of time it takes for the market to correct.
Individual investors typically cannot access the right instruments (typically weirdly structured long term options). Typical institutional money managers cannot because their measurement typically penalizes continuous money loss. Lots of them however may have spotted the opportunity.
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#4An obvious question: how often did they place this bet before it came off? If they did it ten months in a row it would still be impressive. But the return wouldn’t be quite as good.
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#5The probabilities of black swan events are often grossly mispriced by the markets. Looks like it paid off big time.
I'm not sure that's true.
Andrew Gelman once mentioned that Black Swan events are actually routinely _overpriced_ via the Longshot Bias. [1] He had talked about this in the context of the recent Leicester FC win and the odds on that team. [2]
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#6The probabilities of black swan events are often grossly mispriced by the markets. Looks like it paid off big time.
The questions typically are (1) Can you find an instrument that lets you bet on the mispricing (2) do you have the wherewithal to stay solvent for the arbitrary period of time it takes for the market to correct. Individual investors typically cannot access the right instruments (typically weirdly structured long term options). Typical institutional money managers cannot because their measurement typically penalizes c…
Why can't individual investors access them?
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#7Earlier quoted context omitted.
The questions typically are (1) Can you find an instrument that lets you bet on the mispricing (2) do you have the wherewithal to stay solvent for the arbitrary period of time it takes for the market to correct. Individual investors typically cannot access the right instruments (typically weirdly structured long term options). Typical institutional money managers cannot because their measurement typically penalizes c…
Why can't individual investors access them?
You have to find a broker that will sell them to you. Usually these things aren't vanilla options, they're some sort of quasi-option derivative.
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#8I hadn't heard of the volatility index (VIX) until I read a short article about it in the last issue of the London Review of Books. Might be worth looking at of you want a little bit of background on this story: https://www.lrb.co.uk/v40/n02/donald-mackenzie/short-cuts
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#9Earlier quoted context omitted.
The questions typically are (1) Can you find an instrument that lets you bet on the mispricing (2) do you have the wherewithal to stay solvent for the arbitrary period of time it takes for the market to correct. Individual investors typically cannot access the right instruments (typically weirdly structured long term options). Typical institutional money managers cannot because their measurement typically penalizes c…
Why can't individual investors access them?
They can - just buy an put on the ETF via your favorite neighborhood broker like schwab, etrade, etc.
Getting authorized for options trading on your account is pretty straight forward and serves as a last fair warning of how much money you're likely going to lose :)
EDIT: to clarify, most of the "exotic" stuff like VIX and XIV (was) are ETFs that are accessible by "regular" investors and hide away the complexities of properly structuring the underlying position to get the exposure to certain aspect of the market. This opaqueness is what makes them so dangerous IMO.
Re: A Tiny Hedge Fund Made 8,600% on a Vix Bet
#10Seems like pure luck with these guys - they didn’t seem to understand that the issue was just a very badly designed financial product that was designed to go to zero. Kudos to them for the win.