Kosta Ouzas explains why some systems fail under stress while others thrive in chaos. Concave structures like LTCM and Terra Luna work fine until they don't. Convex systems reserve capital for extremes and use trailing exits to lock in gains during recoveries, getting stronger as volatility increases.
One of the most important distinctions in system design Concave versus Convex risk structures. A concave system is strong in the middle but weak at the edges. It commits its resources in calm conditions, so when the stress hits, it's already exposed. Every move against it makes it weaker, narrowing its options until the only one left is liquidation. LTCM was concave. Terra Luna was concave. A convex system is the inverse of that. It stays small in the middle and grows stronger in volatility. It holds capital back for the extremes, and when they arrive, it deploys intentionally. Each new layer improves the weighted average price of the position, making profitable exits much more likely. And because our system uses dynamic trailing exits, even partial recoveries can trigger staged exits, locking in gains without needing the market to return to any theoretical meaning.
