3 ms·
Question for investing people.. say I started a hedge fund, put all the money in vanguard to achieve s&p500 benchmark return, then once a year did an options be
by wtfz 9y ago
Question for investing people.. say I started a hedge fund, put all the money in vanguard to achieve s&p500 benchmark return, then once a year did an options bet with a roughly 97 percent chance of a 3 percent return and a 3 percent chance of ruin. I do this for 10 years, outperformng the s&p 500 by 3 percent consistently. I have 70 percent odds of not being ruined, and I consistent outperform most hedge funds. I have good alpha and there is no way to see that my beta ain't great. Would I become a wealthy hedge fund manager?
- pgwhalen 9y agoI love that kind of thought experiment! In practice, at hedge fund scale, no one is going to sell you options with that risk/reward profile I think.
- noddy1 9y agoThere are ways to achieve this though - using a martingale betting strategy where you take small, high risk bets and basically keep doubling up until you win or bust, you can achieve the same risk-reward profile on most high risk markets
- xchaotic 9y agoIt's a good strategy, if you can afford not to withdraw from the fund on the year (and for several years after) you 97% bet turns sour - there was an article somewhere, which showed that options on S&P singe the great depression almost a hundred years ago, would have only slightly outperformed the index, due to losing in the bear market.
- random28345 9y ago> It's a good strategy, if you can afford not to withdraw from the fund on the year (and for several years after) you 97% bet turns sour If the bet turns sour, you close the fund. The idea is that you grow the fund and take your two and twenty while your bets are winning, and you keep your prior years' two and twenty after your fund collapses.