A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

Another tool used today is to “stress-test” a portfolio by simulating the impact of major calamitous events of the past on the portfolio. In 2008, a multibillion-dollar hedge fund managed by a leading quant used ten-day windows from the crash of 1987, the First Gulf War, Hurricane Katrina, the 1998 Long-Term Capital Management crisis, the tech-induced market drop in 2000–02, the Iraq War, and so forth. All this data was applied to the fund’s 2008 portfolio and showed that these events would have led to losses of at most $500 million on a $13 billion portfolio, a risk of loss of no more than 4 percent. But they actually lost over 50 percent at their low in 2009,

Pah!