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Kris Abdelmessih is not only a gifted derivatives trader, with a 20+ year career at Susquehanna and Parallax, but he is also a gifted writer with an amazing ability to explain the business of trading AND the underlying concepts of trading. Today Kris is one of the most widely-read voices in the trading and derivatives space, writing under his Moontower brand.
The market is 12-15.12 bid. 15 offer.
The broker sizes up the offer.
“How many you got there? How about you? And you?”
A couple of the market makers get flakey once they see him counting.
“You know what, I’m 17 now.”
“Fine, but can you fill the size there?”
“This second, no more shopping.”
“Mine.”
A few minutes pass.
The broker comes back around. “How now?”
“Go fuck yourself. 20-40. Small.”
And that’s it.
It’s a liquidity-clearing trade. The market’s version of punctuated equilibrium.
Small lot sizes from here on out.
The price drifts higher over time. The same amount of volume moves the price by larger increments. The least-capitalized shorts who are also the smallest in the trade begrudgingly cover. Better to live another day. The larger ones lay off some of the headline greeks in related assets, but the basis leaks against them the whole way. At least it’s not a fresh flesh wound every day. Paper cuts aren’t mortal risks, but the job will be demoralizing for a while. We’re gonna do this again? Why don’t I learn? I’ve done well enough. Right? I don’t need this shit I say as I fire up loopnet on yet another chrome tab hoping to find a cap rate in the shape of an eternal palm tree.
Weeks pass. Maybe longer. Who’s counting?
You see the price. 63. Numb. Doesn’t mean anything anymore. You can’t taunt a ghost.
More time.
Wait, 56?
“Anybody doing anything in this?”
“Nah, maybe just recent sympathy with hawkish Fed chatter.”
“You think this thing being up 300% has anything to do with basis points. C’mon.”
“Yea, I don’t know. I’m trying to book Odyssey tickets on IMAX for 3am, can we do this later.”
“Neverm—”
[Ringing. The hoot flashes.]
[Groans and picks up.]
“Sal, I thought I told you to cut the line. The fuck you want?”
“How is it today?”
“I don’t know, Saaaal, why don’t you tell me how it is?”
“At 45”.
“We’re 5 minutes from the close, I can’t show.”
“At 33. They’re gonna trade”.
“I’ll round you out just to be social.”
Next day.
How?
“15-25. Your move, Sal.”
Leo
[On the modern AI thesis] Aschenbrenner was early and smart and articulate about it. This allowed him to raise money, and the fact that it has been basically correct allowed him to return 270% through May.
Leopold Aschenbrenner’s fund, Situational Awareness LP (SALP) started in late 2024 when he was 23. He raised $225mm and, through the use of leverage and being right as hell, rode a legendary heater with assets at peak over $25B about a month ago.
His portfolio concentrated heavily on hardware and chip shares of CoreWeave, Nebius, Bloom Energy, Iris Energy, Micron and the Korean company SK Hynix, as well as a sizable private stake in Anthropic. Meanwhile, he was shorting traditional software companies. You only need to pull up the charts of his longs and shorts to explain how his returns had been so stellar.
Many of his longs peaked in late June. On July 24th, he sent a memo to investors stating that the fund "has not been immune” to recent market volatility. He invited existing investors to commit fresh capital effective Aug 1, citing the most attractive opportunity set since early 2025.
Within the week, SALP would proceed to lose 2/3 of its assets and liquidate its public portfolio to Citadel.
Back to the pit
Trading is about pricing liquidity. Handicapping the price to move a chunk of risk in a particular period of time.
Leopold was very right on his security selection. So right that even net of the liquidation, the fund is still up 80% on the year! That’s got to be unprecedented. But being liquidated in the first place was inevitable.
Let’s go back to the stylized story from the opening.
When an asset rips higher as quickly as these longs did, it exhausts the supply of offers that maintain a sensible relationship to a concept of fair value. For the sake of legibility, we’ll call those sellers the natural investors. The ones whose bids and offers are tied to some semblance of a fundamental model.
If a stock you sold when it 3x’d continues on its way to a 10x in a short window of time, like on the order of months, there is a paradigm shift in its liquidity. In a squeeze, there is a shortage of supply, but those episodes are faster and less mysterious. In the opening example, it’s not a supply squeeze but reluctance.
With the “naturals” long taken out of the stock, the marginal liquidity provider on the offer is an atheist. In other words, a trader. They have no religion about the short. It’s an HFT, a market maker trading some low-capacity intraday basis they discovered in a linear regression, or some passive mechanism with a rebalance toggle.
What do these sellers have in common?
They’re hyper-tuned to the risk. They have a volatility number somewhere in their trade lifecycle.
Fine, who’s buying when the stock is now twice the price that itself was twice the price of anything sensible?
For starters, the original fanatic, especially if they are receiving inflows based on the marks they are reinforcing. Who else is buying? The momos and fomos. Weak hands. The momos are executing a simple bandwagon python script. This is a weak hand by design. The fomo weak hands come in 2 forms. The ones who haven’t had an original thought in their life and the ones chasing a benchmark because they devoted their life to mimicry with just enough leeway to preserve the illusion that their creativity matters. There's a price for everything, so no shade, but calling a spade a spade, this is the weakest hand.
The stock is in a liminal zone. Levitating on the echo flows from the original disturbance. The stock market’s microstructure always presents a wash of back-and-forth trading. The withdrawal of real liquidity is less visible than the example in the opening sequence, which caricatures a market in a derivative or obscure contract that trades on Clearport by appointment but lacks a DOM. But make no mistake, the liquidity of the super stock is broken just like the fake derivative example.
The liminal zone, to quote Kindergarten Cop, “lacks discipline”. The sellers are atheists, the buyers are momos, fomos, and the original mover gathering flows, literally “high on his own supply”, with a mandate to trade on a thesis he publicly telegraphed in an adversarial game. The marketing effect of this strategy was powerful but not free. Why not? Because it rings the dinner bell which reverberates with the sound of inevitability.
Mordecai
When I graduated college in 2000, my mother took my sis and me to visit our family in Sydney and travel Australia for 3 weeks. In Darwin, we took one of those boat tours on the Adelaide River where they hang massive slabs of meat over the sides so us tourists can watch the crocs coil below and then leap high for their meals. Once you get on the river, the swarm of eyes comes out of the weeds as the sound of the motor signifies meal time. I’ll never forget the sheer size and thus the name of the croc they told us was the river’s alpha — Mordecai.
Leo's wild success summoned Mordecai.
Crocs don’t need to chase. They don’t waste energy. The strike happens in a muddy thrash, and shortly after, the ripples of water slow as the trees and surrounding fauna relax in the wake of violent awe.
And even if the alpha crocs turns over, replaced by a new alpha, this species lives forever.
If I can prove how apt this analogy is, you will believe, like I do, that this liquidation was inevitable.
If you’ve been following this saga, you will notice I haven’t yet introduced the true culprit — Leverage + Concentration. The crocs aren’t the villains. In the words of Jack White, “if you’re headed to the grave you don’t blame the hearse”.
The moment Leo chose 4x leverage on a concentrated book, he splashed loudly into the river. From there, crocs just do what they do.
When there’s an economic actor whose day job is to identify forces that will lead to short-term flows in and out of particular stocks, and whose long-term model is to periodically pounce on distressed companies, these models will tend to converge into a model where they trade in advance of the blowup, and then exit and reverse that trade in the rescue.
Byrne Hobart, in the Diff
The economic actor Byrne is referring to specifically is Ken Griffin’s Citadel, but generally, it is the dealer. The primary function of a dealer in any market, whether it’s securities, art, cars, or even being a link in a supply chain, is to price liquidity and manage inventory. SALP’s performance was a confession of Leverage + Concentration. Crank the virtuous loop of momentum and flows into thin liquidity, and those dead eyes surface for a look. If understanding liquidity was easy, then market-making would be less profitable. It simply would not be as valuable a service. So we can forgive Leopold for not realizing his gross market value was in shallower waters than he thought.
Market-making is a psychological grind. Again, go to the story from the open. You get paid $10 to flip million-dollar coins, and every now and then you find out you're on the wrong side of a rigged coin. But even rarer than getting picked off is the chance to feast on fat prey. Now, to be fat, they must have been doing something right, but the weight makes it harder to maneuver than it used to be, and in Leo’s case, “used to be” was quite recent. It only takes a moment of indiscretion to show your belly. Markets are unforgiving because you’re only as sturdy as your worst mistake.
The crocs are always there. Griffin was also there to buy Amaranth out of their positions. Citadel has been in nat gas since the Centaurus era, and with John Arnold retired, Citadel has been an alpha croc in gas trading for well over a decade. If you search my writing, you’ll see a recurring theme of “what equity traders can learn from commodity futures markets”. Futures are zero-sum, so not all the lessons apply, but the ruthlessness will let you borrow a healthy amount of paranoia.
So this was the view I always had wrt equities before
Vs commodities where a lot of shady stuff happens all the time but everyone knows about these games
On the other hand, I'm really less sure now. "It wasn’t certain how close SALP were to a margin call. Wasn’t certain they would have to liquidate in a block" -> I think if you had an idea of their leverage, and saw the price action on all his names, significantly worse than other semis, you could anticipate he would be close to force unwind/liquidate and try to squeeze him.
I admit I don't know any equities trading team where people would do this kind of thing, but it happens often in commodities.
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The word liquidity is a reminder that this is a biological system. Leo priced his trade as if the distribution were exogenous. He would never admit that, but his actions suggest his understanding was purely academic.
Byrne Hobart again:
AI people obsess about existential risk in theory and Leopold has publicly spoken about being aware of it, from a financial standpoint, in practice. But if you want someone who really feels existential risk in their bones, you’re better off talking to a hedge fund manager in Miami.
A mental model for the commodity market I’ve at times lamented and at times celebrated is that for the most part it’s a boring business of blocking and tackling. But now and then a well-capitalized outsider hops Chesterton’s Fence to see if he can force the market to cry uncle. If they’re especially crafty, it can work for a while. You can always beat a dealer on the way in. But you need liquidity to get out and now you don’t have the element of surprise on your side. Eventually, the old illuminati of the business lock arms to go on a hunting expedition. We used to call this “running them in”. If you are forced to cover, there’s little risk to me to bid ahead of you. (That’s not to say the “clean up” isn’t competitive. This is a good thread.)
When the Hunt Brothers cornered silver, the exchange eventually disallowed opening buy orders and raised margin requirements, depleting all the fuel. The exchange used to be owned by traders. They were literally called “members”. You can imagine their position at the top.
The sound of inevitability
In Jurassic Park, Michael Crichton folded an introduction to the field of complexity into the story. The park’s creators’ overconfidence in linear scientific thinking led to disaster. Complexity focuses on chaotic systems like weather (the proverbial butterfly flaps its wings and causes a hurricane across the globe) where models resist equations. There’s a greater emphasis on simulation and higher-order effects. A popular analogy from complexity science is the sandpile. Eventually the sandpile collapses but nobody would say the nth grain of sand causes the avalanche. It simply reveals that the pile angle had become unstable.
When observers consider the timeline (SALP’s peak was likely in late June) they are trying to label the nth grain. Fully embracing the butterfly, here’s my list:
- the SpaceX IPO
- the World Cup
- the uptick in long-term yields
- box spread rates reflecting funding costs rising as demand for leverage increased, with those costs passed straight through to levered ETFs
- a slowing trend increasing chop, which increases drag in levered ETFs, which wears down the momos’ patience faster
- the Knicks winning
- Kris visits Rome for the first time
Inevitability means none of these matter.
So why was a liquidation inevitable? Why was at least one croc guaranteed a meal?
I already said it. It’s for the same reason LTCM, Hwang, Alameda, and Brian Hunter remain cautionary tales:
Leverage + Concentration.
But what’s so lethal about this combination? Why must it lead to liquidation?
Stated as plainly as possible:
As soon as you assert leverage, you are saying not only am I right, I’m right on timing AND path.
It’s a continuous time parlay. Even if he is right on the destination within the time frame of his choosing he can't tolerate a large drawdown in the interim.
There’s just no give in the math.
But the outcome was never about being right or wrong on AI. At ~150% vol, variance drag alone is ~113%/yr, and risk of ruin is roughly a coin flip over the fund’s life. A child can do the math on a napkin (Claude did it for me: “ruin wasn’t unlikely, it was roughly even money”).
Volatility that high pierces every other fact about a portfolio: the thesis, the timing, the talent. The initial success and the margin call are draws from the same distribution.
And this isn’t really conditioning on the reality that a market’s price discovery function means they will push to a clearing price on a faster schedule than your lender would like. If you didn’t have a lender, this is not a concern!
Martin Shkreli had great coverage on the SALP story on TBPN. But thrown in at the end of the interview is this terrific section:
Kelly famously came up with what is now called the Kelly Criterion. It started as a gambling concept before becoming a finance concept, and it mathematically proves the optimal bet size. The formula is your edge minus the reciprocal of the odds. So, if you have a 55% edge, your optimal bet size is about 10%.
Even that is quite volatile for most people, which is why many investors use half-Kelly or quarter-Kelly sizing. The reality is that most traders don’t actually have an edge, yet they trade as if they have a four- or five-times Kelly edge.
That might sound like they’re simply taking a lot of risk, but if you run the simulation, you’ll go to zero almost every time. The simulator is a really powerful tool because it shows that even if you had a 60/40 edge on every trade—which nobody has in the stock market—you’ll still go bust if you overbet.
That’s a real eye-opener. Position sizing matters just as much as having an edge. It’s something I had to learn the hard way over many years: I was almost always overbetting. I think most hedge funds do it to some extent, and certainly most retail investors do. Very few people actually simulate their portfolios to understand what the appropriate position sizing should be.
After I left the Tiger Cub fund where I worked, I spent a short time in the office of a former SAC Capital (now Point72) portfolio manager. He was one of the best managers I’d ever seen—a quiet guy that almost nobody has heard of, now retired. I had the chance to watch him for a few months before launching my own hedge fund, where I proceeded to do the exact opposite and massively overbet everything.
I group LTCM in with other victims of the Leverage + Concentration poison. As a quant fund, their business was actually to lever diversified edges. But once the correlations of their positions converged, their cocktail was spiked with mathematical Concentration. On the surface, you might say what does a position in corn have to do with Treasury basis, but when a single commingled fund cross-collateralizes its leverage, then their size in the market imports a temporary synchronization of price returns.
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Elm Wealth’s Victor Haghani has done a public good by commuting his pain as LTCM partner to teaching the necessity of sound bet sizing. His famous coin-flipping studies show how econ and finance professionals manage to continuously blow up 60/40 advantages by betting far more than what Kelly prescribes.
It gets better. In Fortune’s Formula, I learned that someone betting the prescribed Kelly fraction of their bankroll (which btw implies they have an edge in the first place) has a 50% chance of experiencing a 50% drawdown and a 1/3 chance of experiencing a 50% drawdown before doubling up. In other words, the Kelly fraction is not even conservative. Many traders and gamblers I know will max their betting at half-Kelly.
[The book points out that halving your Kelly fraction will cut your drawdown risk in half but your return only by a quarter so even though your long-term wealth compounds more slowly, the risk-reward is better. That fact alone tells you that the scaling law is extremely punitive if you overbet at all nevermind overbet at the rate Leo was.]
Why Leo, why?
I’m not attacking Leo. I mean he’s very rich, and a bona fide genius. But if the goal is to learn from what we see, I can’t shy from documenting the mistakes despite the optics of seemingly picking on someone half my age.
[His defenders are quick to point out that he’s still up 80% for the year, but all this does is highlight the thin line between zero and hero. We overfit narratives with a comfort that is comically out of tune with what is warranted by circumstance. If Leo loses an extra 25%, an utter blip given his vol, at 4x leverage his investors are zeroed. He made a great call to liquidate, but the presence of liquidity to do so is never a given. In the final hours of a deeply fragile situation, every routine event, hell a Trump tweet, has butterfly potential. Putting yourself in a situation where there is no margin for error is itself a mistake. Leo’s future will revise and buff down the pointy edges of the story’s path dependence, but honesty demands acknowledging that no matter what he becomes, today he is neither lion nor lamb but liquidation was inevitable. He is a man alternating as we do between grace and folly, with neither ever being our full legacy.]
Let’s proceed.
Structure Mistakes
If you are all-in on this thesis, you might be more than all-in on this thesis. You won’t put 100% of your money (and your investors’ money) into the AI boom. You’ll put, like, 300% of your money into the AI boom. You’ll borrow money to lever up your bets on the AI boom. As your AI stocks go up, you’ll borrow more to buy more. Getting a 200% return on your money by buying SK Hynix stock is great, but getting a 1,000% return on your money requires borrowing more money to buy more stock. This is a naturally long-term trade. Aschenbrenner’s famous June 2024 essay series is titled “Situational Awareness: The Decade Ahead.” The point is not, like, “SK Hynix will beat earnings expectations next quarter”; the point is stuff like “by the end of the decade, we are headed to $1T+ individual training clusters, requiring power equivalent to >20% of US electricity production.”
Matt Levine
You have a vision of the future and want to make a fortune; you need to match your funding to the duration it will take to see the thesis play out. The use of recourse leverage, subject to daily revaluation, is wholly inconsistent with the horizon.
He must know this.
That’s why companies issue equity. They don’t want to worry about the next loan payment. The duration of the financing and vision are aligned. A business that cannot fund ops from cash flows is depleting capital and will need to issue more equity. In that sense, its leverage is not reevaluated every day its beholden to investor appetites at discrete points when it refinances. Meanwhile, a self-sustaining profit machine is more like permanent capital. If it doesn’t like investor bids, it can create its own liquidity by buying itself back.
There was a failure in appreciating structure. The vehicle you use to express a vision is no less important than the vision itself. Founders Fund is Peter Thiel’s GOAT-level investing vehicle, which uses locked-up capital to invest in private companies. Meanwhile, Clarium, his hedge fund that invested in public markets, lost 90% and closed in the wake of the GFC. That a hyper-opinionated genius could succeed and fail so loudly in seemingly similar tasks should alert you to the nature of edge, its prerequisites, and limitations with respect to how you express it.
Hubris?
The most famous Leopold I knew of before Aschenbrenner was another genius.
Nathan Leopold.
In bullet form:
- First words at four months and three weeks
- Studied fifteen languages, claimed five fluently.
- Graduated in his teens Phi Beta Kappa at Chicago, headed for Harvard Law.
- A nationally recognized ornithologist at nineteen
Enamored with Nietzsche’s Übermensch (“supermen”) as transcendent individuals with superior intellect, Leopold wrote to his a precocious friend Loeb, that such a man is “exempted from the ordinary laws which govern men.”
They conspired to get away with the perfect murder as proof and tribute to their superiority. They spent 7 months planning the abduction, disposal, and even a ransom demand purely as misdirection.
All this only to be caught by eyeglasses dropped near the body. While the glasses had an ordinary prescription and an ordinary frame, they featured an unusual hinge sold to three customers in Chicago. One was Leopold.
Kelly math would have been trivial to Aschenbrenner by the time he was 10. He probably would have used the word “trivial”.
Ed Thorp, another genius, was able to connect the dots from John Kelly’s equation to its use in investing, effectively inventing the world’s first quant fund (which incidentally seeded Ken Griffin when Thorp shut down and gave Ken all his documents since he saw Ken knew what to do with it all). But I’m increasingly of the mind that Thorp’s genius also included suppressing his own ego enough to take Kelly seriously. It’s an intersection of classical genius and wisdom which itself needn’t be so rare. It’s neither here nor there, but I think the public recognizes that the type of genius we are getting out of Silicon Valley is far narrower than the Thorpian variety.
[Related: The connection and friendship between Thorp and Buffett, whose approach to investing was vastly different, was one of the audience’s favorite parts of the talk I gave at Arbor].
Back to Shkreli referring to a trader he once worked with:
What amazed me was that he managed roughly $300–400 million of his own capital but almost never used it. Eighty to ninety percent of the portfolio was simply cash. He would make these tiny trades—little nibbles—and over more than 20 years, I don’t think he ever had a down quarter. He generated 20–30% annual returns while barely putting capital at risk.
It was an incredible lesson. Then, of course, the moment I got the opportunity to manage capital myself, I was running eight times leverage. Looking back, it was one of the dumbest things I could have done. You live and you learn.
Apparently, you can’t learn risk management. You can only live it. Allocators take note.
The allocator’s mistake
Speaking of allocators…why do they keep falling for this grand thesis routine?
I mean, what makes us human, right?
We love stories. We need stories. We want to see athletes fly. We want the impossible dream. We love that truth is stranger than fiction, after all, fiction is restrained by its need to make sense.
The optimism required to back the impossible is the same optimism required to attempt the impossible. Leopold’s investors were not teachers’ pensions and bean counters. It was his singularity-pilled entrepreneur brethren.
Even if he zeroed the damage would be contained to those who can afford it, so my view is no harm, no foul.
Just to share a personal thought.
I’m deeply uninterested in whiz kids that are too cool for the mundane. I strayed from this once and was burned by giving money to some hotshot who I have no doubt is a genius. It wasn’t a fraud or blowup. Hell, it’s still operating as a respectable, institutionally-approved fund. It’s just expensive mediocrity. If I wanted that, I could find some value fogies quoting Cicero.
I went against my better judgement.
Where is the repurposed crusty trader who's been turned upside down a few times but never had a losing year, even if sometimes it’s a T-bill? I don’t need him originating the ideas, but I need him to call you an idiot and ask hard questions because he’s just as dubious of smart kids as he is of the government. When you use all your brilliance to dress a pump-and-dump in new tech and memes, he reminds you the tail you're selling is tied to a statute of limitations, and anything like that is a non-starter.
Gimme the corny words. A warden of capital. A trustee. A fiduciary. At least they have a chance of not being a grift. I still need to figure out if they’re made of what I want at the point of sale and for monitoring the books. Steady hands. Paranoid. Path-aware. Fat Tony. If it leads with sexy, get me outta here.
I want the C in CAGR because I want to minimize drag.
I want the C in curmudgeon because you’ve heard the line:
There are old pilots and bold pilots, but no old, bold pilots.
We have been in a regime where many of the people who can raise money have built returns and stories in a boom environment, but those environments paper over bad habits, which increases the allocator’s adverse selection risk.
If you’re giving someone money for the long run, you want a battle-tested framework honed by the drudgery of risk monitoring, outtrades, system outages, and the paranoia from the memory of a hardcoded number in a spreadsheet getting you picked off.
Nobody is bigger than the market
A lesson we learn again and again, is that nobody is bigger than the market. Not even the crocs. They survive because they respect it. They’ve seen so much in the course of both providing liquidity and also occasionally taking it to manage risk, that they can have no other relationship to it other than respect.
That means keeping concentration away from leverage. There’s no price worth giving up control of your fate.
There seems to be something deep about risk management that eludes genius alone.
- Leopold couldn’t have been ignorant of betting math.
- Leopold should have been able to understand structure.
- Leopold knew growth would require getting thesis, path, and timing right.
I’m left to conclude that the ancient root of most major errors is at hand. Hubris.
I’m even more confident in this because history tells us that being smart doesn’t inoculate you from hubris and, as the murdering Leopold story suggests, can actively fuel it. But since I have never spent a day being a genius, any more than I jump like Jordan or sing like Sinatra, my sense of limitation leaves me unable to empathize with Leopold’s blind spot.
This is a point of encouragement to everyone.
When you are limited, you seek approaches in light of your limitations, which explains the reality we seek all around us. That the quality of our decisions which determines flourishing has no relationship with excessive intelligence.
Since investing and managing money is a decision overlay that sits on top of research and analysis functions, the manager’s efficacy is rate-limited not by brains but by wisdom.
We should be a bit more obsessed with where wisdom comes from than continue to fall for dazzling minds.
If there’s a bit of poetry in this episode, it’s that Leopold’s only out was a singularity bigger than the market’s boring old constructs like liquidity and collateral. Maybe he could have gotten there. And he still has a chance. His mistake was turning it into a race with the crocs.
If you don’t mix Leverage + Concentration, you never have to get in the water.