Risk Management at Scale: How We Chase 50% Returns Without Gambling the Farm

Since sharing our last performance update—highlighting a 50% return—the most frequent question has been:?“Are you trading too big, and how do you quantify the risks you’re taking?”?The answer lies in a framework built not just to survive, but to thrive in uncertainty. In this article, we pull back the curtain.

#RiskManagement #BlackSwan #HedgeFund #PositionSizing #Compounding

1. Black Swan Risks: Preparing for the Unpredictable

The 9/11 attacks. The 2010 Flash Crash. The 2020 pandemic meltdown. These are?Black Swan events—market shocks so extreme they defy historical precedent. Long-Term Capital Management (LTCM) collapsed in 1998 because their Nobel-winning models ignored this reality, assuming Russia’s debt default was “impossible.”

Our Strategy

1. Defined Loss Caps: Every trade is structured with a contractual?ceiling?on potential losses. For example, in a?put credit spread, maximum loss is mechanically capped at the difference between the strike prices of the long and short legs—even if markets collapse to zero. This worst-case scenario is calculated upfront based on the?trade’s architecture, not historical volatility or backtests. By anchoring risk to the instrument’s design, rather than past events, we account for Black Swans that could dwarf anything in recorded history.
2. Position Sizing Anchored to Recovery Time: We calculate the years required to recover from a black swan loss using:

Years?to?Recover = -ln(1 - X) / ln(1 + R)

where?X is the maximum possible loss (%) at the portfolio level and?R?is the annualized return (%). We size our positions so that should we suffer the worst-case loss in a Black Swan event, the recovery time is no more than 1-2 years.

Example:

A portfolio with?12% annualized returns?and a worst-case loss of?15% would require about 1.4?years to recover. This stays within our 1-2 year recovery threshold.

Why It Matters

By anchoring position sizing to recovery time, we ensure that even worst-case losses don’t derail long-term compounding. Surviving a Black Swan isn’t enough—thriving afterward is the goal.

2. Execution Risk: When Systems Fail, Guardrails Survive

In 2012, Knight Capital lost?$440 million in 45 minutes?after a rogue algorithm malfunctioned, flooding markets with unintended orders. Execution risk turns technology from an asset into a liability—unless you engineer redundancy.

Our Guardrails

1. Position Sizing Limits: Hard-limit on the position size for each trade. Runaway trades can’t bankrupt us.
2. Retry Limits: Failed orders retry X times max—no infinite loops or runaway trades.
3. Real-Time Reconciliation: Broker API data cross-checked against internal records after every trade. Mismatches halt trading.
4. Broker-Hardened Stops: Stop-losses reside on broker servers, not ours. Execution survives our outages.
5. Threshold Alerts: Every position has a stop loss in place as standing orders on broker servers. Should they fail and losses exceed predefined thresholds, alerts escalate to our on-call team.

Why It Matters

Knight Capital’s collapse wasn’t bad luck—it was missing guardrails. We assume systems?will?fail, so we engineer them to fail?safely.

3. Liquidity & Systematic Risks: Avoiding Hidden Traps

The greatest dangers lurk in the shadows: positions too illiquid to exit, overnight gaps, or predatory bid/ask spreads.

Our Rules

1. Liquidity First: We trade only?SPX index options?($500B+ daily volume). No illiquid “return traps.”
2. Spread Thresholds: Trades execute only if bid/ask spreads are?within a normal range. Wider spreads = asymmetric risk.
3. Minimize Overnight Exposure: All short option positions close before market close. Earnings, Fed decisions, and geopolitics don’t surprise us at 3 AM. Recent example: we had zero positions over weekends, so the DeepSeek announcement and the subsequent selloff had no impact on us.

Why It Matters

Forced exits kill returns. Illiquidity turns paper losses into real ones. Overnight gaps turn dips into disasters. By neutralizing these risks, we ensure the only battle left to fight is market movement—not the invisible threats of operational failure.

The Bottom Line

Our 50% return isn’t a product of reckless bets—it’s the outcome of a system engineered to?constrain?risk, not ignore it. Black Swans, rogue algorithms, and liquidity traps aren’t hypothetical; they’re inevitable. By quantifying worst-case scenarios, hardening systems against failure, and prioritizing survival above all else, we turn volatility into an ally.

Because in investing, the only thing more dangerous than losing money is losing the ability to recover.