contracontrarian

John Paulson: Long Financials

"You'd think a hedge fund of their reputation and research ability would know the mathematical flaws inherent in the vehicle they've selected."

There is no flaw in those ETFs,they perform exactly as they are supposed to,all depends on his expectations:

If he expects XLF to move in an uptrend without too much volatility,SKF will lose him less than a similar short position or put options,while he is still protected against an unexpected sharp drop in XLF,if this is what he is hedging for.

Five Reasons the Market Could Crash This Fall

"If Wall Street did put $50 trillion at risk… and 10% of that money goes bad (quite a low estimate given defaults on regulated securities) that means $5 trillion in losses: an amount equal to HALF of the total US stock market."

Any one particular Wall Street firm can lose everything they have or even more,but other Wall Street firms would earn the same amount at the same time,as they are on both sides of those derivative positions. Alltogether "Wall Street" can not lose money on their derivatives...