A CIO shares the strategy behind 'The Big Short' garage hedge fund that flipped $110,000 to over $80 million — and explains how to use the same approach in today's stock market to make extremely cheap bets for 'though-the-roof returns'
, the term typically used for a crises that are extremely difficult to predict. This has shined a spotlight on a specific type of hedge funds: the ones centered around profiting off of tail risks, a term used for outsized market moves far beyond what's normal.
Before 2020, not many retirement funds or larger pension funds considered this type of strategy as part of their portfolio. But Sidial said that last year, he saw the highest amount of those allocations flood into these strategies. In 2021, these firms saw their second-largest cash inflows, according to Eurekahedge data cited by Bloomberg. And for good reason: in reality, if the S&P 500 dropped 20% in a day, there are many funds that would get wiped out, he said.
"So a concave bet would be, I'm going to bet $10 to make one, and generally the odds would be in my favor. A convex bet would be if I'm going to bet one to make 10 when the odds are not in my favor, but there is a chance that I could still win," Sidial said. Another example is buying deep out-of-the-money calls on the CBOE Volatility Index , also known as the"fear index" which gauges volatility based on S&P 500 options.
"Let's say, for example, I bought 50,000 contracts of the VIX 100 call. If there is a nuclear bomb, god forbid, tonight that goes off, and let's say VIX goes to 50 tomorrow, the options are nowhere close to being in the money on the 100 strike, right? You're still 50 points away. However, those options that I bought at 100 will be priced through the roof," Sidial said.
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