There is nothing particularly fraudulent about the way the described hedge fund makes money. Selling implicit insurance against the unlikely event is how majori

There is nothing particularly fraudulent about the way the described hedge fund makes money. Selling implicit insurance against the unlikely event is how majority of investment industry operates. There are two types of investment strategies generally - the ones that bet on equilibrium continuing holding (or reverting to its mean) and the ones that bet that an extreme change will take place. If you take any credit risk at all (like buying a bond) -- you are in effect selling your creditor an option to default for which you'll be paid a small premium over the life of that bond. Same if you are betting that price of some mildly 'undervalued' security will come back to its historical valuation average. The example of betting on a change is Soros betting that the Pound will be dramatically devalued. The first two examples are called 'investment', the later a 'speculation'. Of course, we know why. "Investment theory" holds that extreme events are very unlikely. So betting on average is the only sensible thing to do. Which is rubbish, of course, because markets are not random and are not described by a normal distribution no-matter what "efficient markets hypothesis" tells you. Markets are dynamical systems and extreme events happen quit often So, a hedge fund manager who implicitly sells insurance (options) through his strategy is a rule in the industry, not an exception. Articles like this only get attention during times of financial crisis. During the peaceful 'mean-reverting' times (like 5 past years) unscrupulous managers absolutely crowd out the risk-conscious ones. And the investment pseudo-science actively encourages that through use of useless statistical tools like Markowitz portfolio optimisation etc.