Back spreads the Greeks and Nicholas Taleb

Tail hedgers aren't paid 2/20, at least not in this century. I suspect you're not in the industry.

 

It doesn't matter what they are paid if all they are doing is buying OTM index puts. Investors can do that on their own for 0 and 0.

 

I suspect you're not in the industry.

 

I wash cars for a living. Discount my posts accordingly.

 

Spitznagel purportedly purchases long S&P puts as a tail hedging business model for Universa and combines market-making activity to reduce the cost of negative carry.

 

The last interview I saw him give he said most of his attention was being paid to treasuries and that he was building long term positions in DOTM puts since he firmly believes it will be higher rates that will be the source of the next tail event.

 

Thanks for sharing that. His presentations, especially as of late, emphasize the strong inverse correlation of S&P puts as a more appropriate "safe haven" than bonds, gold, etc.

I would be surprised if he has shifted his tactics to taking an explicitly bearish position on bonds via bond puts, despite the looming risk of rising rates. Central bank monetary policy failure is undoubtedly a potential tail risk event, nonetheless.

 

In that case he should do very well this 1st quarter of 2018.

 

Chris Cole mentions "never hedge a non linear product with a linear product." Whats the intuition behind this? If i am short a strangle and my delta risk increases, is there a problem with using the underlying to hedge? I understand i will still have gamma and vega risk but isnt using the linearity of the underlying the best way to hedge the delta risk?

Also, he does not run a tail risk fund but rather a long vol fund and states there is big difference between the two. CBOE tracks two indexes. The first being a tail hedged index and the other a long vol index (Chris Cole's fund is part of this). The long vol index has a positive carry vs the tail hedged index which doesn't. Does anyone know where one can find examples of some of these long vol funds methodologies?

 

You're not likely to find methodologies in the public domain. However, think of portfolios in terms of convexity - vast majority have a positive carry but negative convex risk; "long vol" will typically construct portfolios in the other direction, that is, negative carry but with a positive convex profile.

In other words, are you short or long convexity? The rest is noise.