The Discipline Nobody Sees: Jackson Wong on How Theo Quant Actually Thinks About Risk
An analysis of backtest rigor, execution friction, real-world slippage, and the architecture required to isolate tail risk.
Jackson Wong ·
Background: In the first part of this conversation, Jackson Wong explained why he chose arbitrage over prediction, because no one, including him, can read markets reliably and consistently to build a firm around it. Saying that is the easy part. This second part is about what it actually costs to mean it: the unglamorous work of testing an idea before it trades, holding a boundary when a lucrative distraction shows up, and admitting where luck did the work that skill likes to take credit for.
Walk me through your real checklist before greenlighting a new strategy, not the official version.
It starts with an idea, and from the idea, a hypothesis. From there we backtest it statistically and try to prove the observation is actually true, not just appealing. Then we have to confirm the trade genuinely exists, that it can be isolated and captured, and that we can build an execution model around it that leaves us with profit once costs are accounted for. By the time all of that is checked off, the backtest itself almost doesn't matter anymore. You already know.
How do you actually think about risk, day to day?
Not the way most people assume. We don't really think of it as trading risk in the traditional sense, because we don't take directional bets. We're always hedged, either delta neutral or dollar neutral. So if you try to evaluate our performance the way you evaluate a directional quant fund, using something like a Sharpe ratio only, you would be misinterpreted entirely.
The real risk is structural. Markets shift, exchanges change how they operate, infrastructure gets rebuilt while you're still trading on it. The risk isn't being wrong about price direction. It's managers not adapting fast enough, or not being sensitive enough to what's actually happening in the market to notice the shift in time. That's what we're really managing. That is the real alpha.
There's a quieter version of that same risk too: where we choose to spend our time, and which products we actually trade. Neither is a given. Every hour spent chasing one opportunity is an hour not spent on another, and every product we take on is a deliberate call, not a default one. That allocation is part of risk management too, not separate from it.
How do you actually secure what you're trading with?
We don't rely on any single point of failure. It's multisig amongst us, our fund admin and the custodian across hot wallets, hard wallets, and accounts — no one person can move anything alone. Our capital itself sits with institutional custodians, not on hot wallet we control ourselves. So in general it might take days before we can move funds from left to right. It's not a glamorous answer. That's kind of the point.
What's the closest Theo Quant has come to a real loss or a costly mistake?
Market-structure events on exchanges, the kind that hit a lot of firms doing what we do, are the honest answer. I won't pretend we got through them on pure skill. A small part of it was luck. What wasn't luck was the position we were in going into it: we've never chased scale just because market conditions made it look easy. We deliberately stayed smaller and more nimble than we could have been. At the end, luck only shows up for those that are ready.
That discipline is what let us come through those moments with room to adapt, rather than being forced into decisions under pressure. The lesson wasn't really about that one event. It was a confirmation of something we already believed: don't assume any counterparty, including the exchanges themselves, is looking out for your interests. You have to understand their incentives, not just your own thesis.
Is there a strategy or opportunity the team was genuinely excited about that you personally killed?
Yes, and it wasn't even a trading strategy. During the last bull run, we had multiple offers from listed companies to acquire us, purely because of the valuation uplift they'd get from absorbing a quant fund. Some of those offers were genuinely lucrative.
We turned all of them down. It didn't fit what we're actually trying to build, which is a firm meant to last for decades, not an asset to be folded into someone else's balance sheet at the top of a cycle. That's not a decision I had to agonize over. It just wasn't what this is for.
What's the one discipline about how Theo Quant operates that you'd never compromise on, even under pressure to move faster?
We will never trade directionally. No naked positions, ever. We are always hedged, delta neutral or dollar neutral, with no exceptions. That's not a guideline we bend under pressure. It's closer to a hard boundary.
Next in this series: why Jackson thinks about Theo Quant in decades, not cycles.