Deleted the tweet on tail risk hedging. We’ll put out a short paper on it with more data in a few weeks. Have a good weekend, folks.

Had this conversation with the guys on the desk today; If you sell 1% of AUM in premium on tails consistently, you’re guaranteed to blow up if you play the game long enough. That’s not a maybe, it’s inevitable. But if you buy 1% of AUM in premium on tails, there’s no guarantee you’ll get rich. Funny how those two outcomes are the extremities of one another but aren’t mirror images of each other. One path ends in certain ruin; the other, uncertain reward.

For years, we’ve heard tail risk managers make the case that a tail hedge reduces portfolio variance, allowing investors to compound returns more efficiently and ultimately achieve a higher geometric return. The claim is that allocating 1%–3% annually to a fixed-cost tail hedge improves performance compared to simply being long the S&P. Some even go as far as saying that in any 3-month, 20% drawdown in the S&P, their hedge would make the investor “whole”….meaning a 2% hedge magically offsets the losses in the remaining 98% equity allocation (S&P). Here’s the issue. Most of these claims are built on overfit data which are anchored to extreme episodes like 2008 and 2020. When you extend the lookback to a more statistically meaningful timeframe, say 70 years instead of 20, you see a very different picture. Portfolios with high bleed tail hedges often underperform portfolios that aren’t hedged at all. So we stress tested it. And we did everything possible to favor the tail hedge. We modeled it as a one touch option: zero decay until year-end. No rolling, no pricing shifts, no slippage, none of the real-world drag that comes with derivatives. We assumed perfect timing: the manager exits the hedge at the top of the vol spike, covers the entire drawdown, and re-enters the S&P at the exact low. So this is basically a 2% yearly allocation in a one touch option, that as long as the S&P drops 20% in a 3M rolling window, the manager recovers the entirety of the losses on the remaining 98% their portfolio, with their hedge. It’s pure fantasy, even for the best traders alive. And yet, we gave them that fantasy. We also ignored fees. In reality, many tail hedge strategies charge “custom solution” premiums that amount to north of 2% in annual costs, far higher than standard hedge fund fees. So here’s what we found: even under these absurdly favorable assumptions, simply holding the S&P outperformed the hedged portfolio. Does that mean tail hedging is useless? Not at all. But it does mean that most static, solutions-based tail hedges—with heavy decay and unrealistic assumptions—do more harm than good. So the next time someone says, “It doesn’t matter if the hedge loses money,” show them the math. A hedge that bleeds too much, no matter how it’s marketed, can quietly destroy a portfolio. It’s not about whether you hedge, it’s how you hedge that determines whether it adds value or just drags.

LMFAO what happened to the deal made weeks ago? Wasn’t India one of the first countries to strike a deal with the U.S.? Take notes, we are living in the real version of financial Groundhog Day.

“I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.” - Ed Seykota

It feels like /ES 6500 is inevitable. At that point I’ll be fully out of all the S&P upside deltas that were scooped back in May. There’s better R:R elsewhere, and the index should give another shot to scoop those up again into the end of Q3.

BESSENT SAYS AUGUST 12 TARIFF DEADLINE LIKELY TO BE EXTENDED

Finance twitter is a peculiar place. So much overconfidence across many accounts selling stuff with so little objective and measurable track record of success.

Now that ISDAs are the topic of the day, here’s a funny story for you. Once, I was asked to make a market on this absolutely absurd swap…..it had 11 different legs, was contingent on time, and involved some sort of volatility shift. I don’t even remember the full details (lol). I tried plugging it into the pricer (something every exotics desk has), but the thing just wouldn’t compute. So I brought it to my boss. He let out a sigh and said, “Go to the worst desk you know, two average desks, and the best desk you know. Get quotes for the other side of the trade and just quote the client the mid of that.” So simple, yet so effective. Whether you’re trading wildly illiquid exotic notes or selling apples at a farmer’s market, pricing always comes down to one thing: supply and demand.

I would like to give you guys some interesting volatility commentary but there is none 🤣. Front month /VX is annoyingly sticky. Short dated techy upside is wildly expensive, but a straight delta play / call spreads continue to pay. S&P 3-5M slightly OTM upside remain cheap. S&P 1.5yr - 2yr downside tails remain cheap. Summer lull in full effect, don’t fight it, enjoy the weekend everyone!