A lot of you probably know Benn Eifert. I’ve linked his stuff here before, I’ve referenced his work, some of you have been following him for years. And for those who haven’t…no worries, I’ll catch you up.
Benn was running a relatively small, volatility-focused, hedge fund. And recently the firm had to shut down due to investor outflows. That news traveled fast. Not because of a blowup, not because of a risk management failure (maybe?), not because anybody lost their shirt. It spread because Benn had a presence on Finance Twitter, and not the mealy-mouthed, carefully PR-approved kind. He said things. Real things. About real topics. Some of them had nothing to do with markets.
And for that, people celebrated his failure.
They danced on this man’s grave — not because he blew up a fund, not because he misled investors, not because he did anything wrong professionally — but because he had the audacity to criticize the current US administration and the current Israeli government. That’s it. That was the crime (I think).
Look, I have no money with Benn. Never did. But I’ll tell you something, I feel worse about what happened to him than I do about some managers I actually have capital allocated to: AQR and Militia. Shops whose founders I don’t exactly see eye to eye with on a number of things. But that’s the deal you make. You separate the person from the process.
That’s actually my whole framework here. I hold zero ESG. Zero. I don’t believe in mixing personal values with portfolio construction, I think it clouds judgment and costs returns. You want to change the world? Write a check to your cause. Don’t mix up your Sharpe ratio with it.
Now, would I personally draw a line somewhere? Sure. Chamat: easy call, the man’s track record as an allocator is a disaster regardless of anything else. Thiel? Yes but harder. But Benn? He didn’t say anything more pointed than Cliff Asness has said. He didn’t go further than plenty of others who still have their Bloomberg terminals and their investor letters and their AUM intact. He just happened to pick the right side of the argument. Which, as we are all painfully aware, is not exactly the popular side right now.
I genuinely hope he comes back. He put out the full story of what happened, a thread breaking down the whole thing, and I’m going to share it below in full. I’ll have some thoughts on the other side of it.
Good morning my loves, happy Saturday. Sorry I’ve been quiet, obviously been busy, but thought it’d be nice to give you all the details on the multi-strategy absolute return program that experienced the 28% drawdown this year. QVR has several different parts of its business, including a highly customizable solutions business, a Convexity Alpha product designed to compete with hedged equity products like JP Morgan’s hedged equity fund (the infamous collar), and a nascent crypto derivatives business. This program was a recently (April 2025) reorganized version of our longtime flagship absolute return strategy that launched in 2017. That product made +78% in 2020 and is designed as a market-neutral strategy taking advantage of dislocations in derivatives markets.
Investors wanted more diversification and more risk. We added a multi-PM framework, with internal and external derivatives portfolio managers sitting on our platform and trading into our systems and technology, under the same risk allocation and risk management framework. We also increased the overall long-term risk target for the strategy from 10-12% to 15-18%. The anchor investor for the new commingled fund had been asking us for a long time to design a separate share-class with increased risk (for capital efficiency purposes) for the old fund. The new version of the strategy did reasonably well in 2025, making +10% net between mid-April launch and year end.
We saw large inflows into VIX products that drove the basis of VIX futures over S&P forward vol to very high levels and steepened the VIX term structure. We also saw extraordinary inflows into dispersion trades, including via bank QIS products which allow institutions that have very limited knowledge of the strategy themselves to get exposure via total return swap. We also saw option selling pressures at the front of the term structure continue to grow, with record growth in call overwriting funds and retail traders selling options. So gamma has looked persistently cheap – but at the same time, realized volatility stayed very suppressed. December 2026 saw some of these themes pull back a bit, with some of the richness coming out of volatility and out of the VIX term structure, and we had a good month especially in trades which were short volatility (via put spreads on VIX) versus short delta (via ES futures).
Starting in January 2026, we experienced correlated drawdowns across many different sub-strategies in the multistrat. The main losses were in the centerbook that I run with Anna and Jimmy, not in the other PM’s books. These are strategies which conceptually and historically are quite uncorrelated. In some cases you can tell a pretty reasonable story about why they were behaving in a correlated manner, and I’ll come back to that. In other cases there were just totally idiosyncratic losses. For example, as the Iran-Israel conflict built, what we saw was a large surge in implied volatility in the areas of the volatility complex that are popular hedges and were already the most expensive on a relative basis: VIX futures and options, medium-term (2-4 month) SPX options
That happened without any material selloff in equity markets and without any realized volatility whatsoever. Investors did not want to sell their equities and they panic-hedged aggressively while holding their positions, so downside did not materialize. We saw persistent losses on short vega, short delta positions, as rising implied volatility was not compensated for by falling equity markets. Historically, this is generally a mean-reverting phenomenon, and signals stayed strong, so we held these positions. We also saw persistent losses on term structure positions in which we were long cheap gamma at the front of the curve, short expensive volatility in the belly of the curve, and long again at the back. No realized volatility meant no gamma PNL, and 2-4 month vol went turbo bid. We had a similar experience in our skew positions, where we were long the massively over-supplied long-term downside on the back of autocall issuance in single names and index, short medium-term downside against it, and long short-dated crash puts.
At the same time, our large long correlation positions that we’d started to build at a historical all time high spread level suffered. Usually those would be extremely complementary to our other positions from a risk perspective. We look at dispersion in terms of the volatility spread (of weighted average single-name vol over index vol). That spread is higher when correlation is lower. We started building a reverse dispersion position at all time high spread levels around 17.5 (3-month tenor). That spread went as high as 22. Normally, low implied correlation and a high vol spread at the 3-month point would be associated with cheap index volatility in the belly of the curve and our term structure and skew positions doing very well. Not this time. Also, idiosyncratically, we were short 2026 dividends in Europe which looked like they had no risk premium left in them, hedged with much cheaper 2027 dividends, but there were a series of fundamental upside surprises in dividends that pushed the 2026’s up dramatically.
Meanwhile the spike in energy prices hammered the 2027 dividends on concerns about corporate earnings. Nearly all of these sub-strategies and positions are ones where, if you experience losses, typically the positions are getting more attractive, and from a portfolio management perspective you want to (cautiously, prudently) add more risk. Which we did. The idea of mechanical stop-losses and cutting risk during drawdowns is sensible in some strategies; it is applied heavily by pod shops for this reason; but is generally inappropriate in a diversified, risk-managed derivatives strategy based on dislocations. No one month was that bad, no one trade experienced some major blowup, but four months of down 7-9% in a row, even in an 18-vol target strategy, is too much for investors to reasonably handle. Our investors were great through this process. Large outflows from our flagship product made the economics of a small/medium sized hedge fund business too thin on a standalone basis, so we’re in acquisition talks with various friends at larger firms.
The team has done a phenomenal job and the technology and IP we’ve built are very valuable, we’re going to end up with a great home, and I’m very proud of everyone. I’ve rolled way more 6’s than anyone deserves to in my career, and eventually it’s your time to roll snake eyes You can hindsight trade yourself into the ground, obviously. There are many things I could have and should have done differently, and many lessons learned. I’d say the most important one is simple and obvious… I should have taken more seriously the shift in realized correlation across our strategies. I of course saw this was happening, and attributed it to the correct factors, but saw the rising expected return from dislocations.
and actively chose to hold and increase positions that we believed in, waiting for the reversion that would take us from down 15-20% on the year to up 20% and make us look like geniuses…. obviously did not turn out to be the right thing. so this was a risk management failing, but a much more nuanced one than just having a stupidly risky trade on and blowing up — it was about how to manage a long difficult path of losses where those losses make your positions look more attractive and finding the right balance between defense and offense. i didn’t get it right this time. but we shall ride again 🙂 oh yes — the rumors of my death have been greatly exaggerated, etc 🖤 the amount of lovely outreach from all corners of finance and otherwise has been wonderful. we have so many friends and many people have loved following us and our content and it’s just been fantastic.
There’s a whiff of LTCM in this story. Not a direct comparison as the situations are meaningfully different…they were sitting on a 28% drawdown FFS. But the echoes are there.
This whole thing is also a masterclass in knowing your investor base. It’s exactly why many serious money managers won’t touch an ETF wrapper with a ten-foot pole. Capital flows in easy. Capital flows out just as easy. That’s not a feature, that’s the whole risk. I put this in the “model risk” bucket when I think about some of my own ETF holdings. Take UEQC or CRRY this year. It’s not some far-fetched scenario that an issuer pulls the plug if investors bail after a rough stretch. The problem is often investor expectations, not the product.
Now, was QVR’s portfolio diversified? Were these genuinely different trades or just one trade wearing different costumes? I saw people on Twitter saying it was all the same trade. But sometimes, it really is more about flows than fundamentals. David Orr said something interesting a while back: he realized his fund had been running closely correlated with AQR’s long/short strategy. Two different processes, totally different models, AQR’s being significantly more sophisticated. Same drawdown. Same timing. Same pain.
This happens more than people want to admit. I remember someone pointing out that 2022 was one trade. Didn’t matter if you were in equities, bonds, oil, commodities, the dollar: different markets, same rationale. One trade.
Years ago, for my job, I came across an Australian Absolute Return fund (it’s got an ETF share class as well, ticker XARO) that runs relative value strategies in the interest rate space. When I read through what Benn was doing, I recognized something similar in spirit. And that’s actually why LTCM kept coming to mind for me. The foundational ideas rhyme. XARO had its own brutal stretches where rate curves across different markets just moved together, acting completely irrational (ehm) in unison.
After years of listening to Cem Karsan, I’ve come around to one explanation for why this keeps happening: flows. Different trades become the same trade because different participants pile into whatever worked recently. It’s not that different from what Einhorn has been saying about passive investing killing value. You find the dislocation, you take the other side, and then you wait for everyone else to figure out what you already know. Spread closes. You win. Simple concept. Brutal execution. Until it doesn’t work.
And one more thing: I never hear these managers talk about catalysts. Value guys have gotten better about this, but the classic version is just: “Look at this dislocation. I’m taking the other side.” And then they wait. The dislocation is irrational, so they look at how irrational things have gotten historically and use that as their benchmark. That’s the whole game.
Why is CRRY three times leveraged? Why not two? Why not five? There’s no universally correct answer, but there are plenty of wrong ones. Too low and nobody looks at your product because it delivers low returns. Too high and, sooner or later, you’re writing goodbye letters to investors. I couldn’t find CRRY’s AUM history and honestly, part of me is surprised it’s still standing.
Benn faced the exact same dilemma when an investor came to him and said, essentially, “juice the volatility so I can size down my allocation.” Which, by the way, is completely logical: we’ve written about this exact dynamic here before. I’ve said I wish DBMF ran at double the vol it currently targets. The problem is DBMF would cease to exist, because too many investors would see the swings and run. Because we live in a world where nobody actually looks at their portfolio in any holistic way. They just stare at the line. The single line item going up or the line going down. That’s the whole analytical framework for most people.
So when Benn saw the spread widening instead of closing, he bought more. Just like the LTCM guys did. Just like every hedge fund manager who came before him and then showed up on Bloomberg six months later saying “Yeah, I was down huge in the spring and then I closed the year up massive, look at my big brain.” Is it a risk management failure? Maybe. But the man was down 28%. Let’s keep some perspective on what we’re actually talking about here.
What I am reading now:
Follow me on Bluesky @nprotasoni.bsky.social
0 Comments