The End of the Chaos Trade

Nassim Taleb famously made his (first) fortune in the stock-market crash of 1987, and went on to an entire career based on using the derivatives market to bet on "black swan" events. Which raises the obvious question: what if the black swan event involves the collapse of the derivatives market?

Andrew Lahde is clearly thinking along such lines:

The best-performing hedge fund manager of the past two years has closed down his funds and is returning money to investors after concluding that the danger of losing money from a bank collapse is too high.
Andrew Lahde, founder of California's Lahde Capital, told investors last week that further credit problems - the basis of his profits - were likely but the reliance of the bet on bank counterparties made it too risky.
The move by Mr Lahde, who returned 870 per cent last year in one fund betting against subprime mortgages, and was at one point up more than 1,000 per cent, underscores the threat that is posed to hedge funds by bank failures.

I wonder what happened to all those Bear Stearns traders who put on the famous "chaos trade". If they put on a similar position at hedge fund somewhere, they will have surely made many millions of dollars in the past few weeks. But at some point it pays to cash in your winnings, before they, too, get eaten by the chaos.

Interestingly, if they needed a nudge to unwind their trades, the short-selling ban was surely it. I love the irony: Christopher Cox, Friend of Shorts. He gives them all the incentive they need to take their profits!

(HT: Alea)