
Nassim Taleb's “Black Swan” Fund Made 1 Billion On Monday - randomname2
http://www.wsj.com/articles/nassim-talebs-black-swan-fund-made-1-billion-this-week-1440793953
======
Animats
His fund loses money most years, and he issues press releases when they have a
big win. The basic idea is to buy cheap options that are way out of the money.
Most of those options expire un-exercised, so they lose money on them. On big
market moves, there's a big win. His last big announced win was in 2008. If he
had a regulated (not "qualified investors") fund, the performance data would
be public. But it's not, so there's no public baseline for evaluating
performance.

Taleb claims that options far from the current price are often underpriced.
Whether or not this is the case is not clear.[1]

In 2009, Taleb was caught exaggerating his fund results.[2] Also in that year,
he had a fund which bet on US dollar hyperinflation.[3] Wonder how that came
out. He's not saying.

This is called the "cherry picking problem" in fund rating, and it's why, for
public funds, the SEC requires funds to report 1, 5 and 10 year results after
fees as their primary reporting numbers. For investment advisers, there's a
rating service called Hulbert Digest, which subscribes to all those expensive
newsletters and computes how you would have done if you followed their
recommendations. Hulbert then publishes an expensive newsletter with the
results. Taleb's fund is not checked by the SEC or Hulbert, so claims should
be viewed skeptically.

[1] [http://blogs.reuters.com/felix-salmon/2011/08/11/black-
swan-...](http://blogs.reuters.com/felix-salmon/2011/08/11/black-swan-funds-
have-their-day-in-the-sun/) [2] [http://www.businessinsider.com/wait-before-
you-invest-in-nas...](http://www.businessinsider.com/wait-before-you-invest-
in-nassim-talebs-new-fund-2009-6) [3]
[http://www.wsj.com/articles/SB124519615631521063](http://www.wsj.com/articles/SB124519615631521063)

~~~
fauigerzigerk
But don't you think his clients know that? If I'm buying fire insurance, I
expect to lose money on it. I'm not betting on my house burning down, I'm just
limiting the impact in the unlikely event that it does.

Now, if your point is that Taleb doesn't explain it that way, you are right.
But the only astonishing thing about this is that the WSJ deems it worthy of
reporting that put options have gone up a lot when the market went down a lot.

~~~
Animats
_" But don't you think his clients know that?"_

Hedge funds, as a class, underperform the market; the "2 and 20" fee structure
eats most of the gains. Yet many "qualified investors" buy into them.

~~~
fauigerzigerk
That supports my point that many hedge funds are being used as insurance by
institutional investors who make their money elsewhere.

Putting the fees aside for a moment, I think that hedge funds as a class can
be expected to underperform long-only funds during a years long rally.

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codexon
I would have to say, isn't betting on disaster going to end up one day having
the counter party saying "sorry Nassim, I am bankrupt, I can't pay you"?

~~~
c3534l
If it's a short sale, then Nassim already has the money and is actually the
one at risk of not being able to pay if the price skyrockets. There is a
bottom to how low a stock can go, but no theoretical upper limit. Although
realistically he'd likely be forced to buy into stock if it got too high, keep
some reserve of money on hand, and be insured against extreme upticks anyway.

A short sale is an agreement for a party to buy a stock at a discounted price
on the condition that the other party buy it for that person at a later date.
That is, I say "That Chinese stock isn't any good. In two months the price
will go down. So tell you what, you give me the money for that stock and
you'll get your stock in two months, no matter what the price plus some extra
as a discount. If that price goes down, I pocket the difference. If it goes
up, I pay that difference as well out of my own pocket."

The article is behind a paywall, so I don't know what specific strategy he
used. But it'd probably be something along those lines. A bet against someone
that the price is going down using his own money.

Besides, that sort of risk is exactly what stock traders do for a living -
analyze and account for risk. And Nassim is a specialist in a special kind of
risk: risks people don't encounter often and thus systematically
underestimate.

~~~
IkmoIkmo
> The article is behind a paywall

Just copy-paste the article's title in google, then click it and the paywall
disappears.

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fixxer
1 billion minus a rediculous amount of theta and gamma during the entire bull
run. Meh. Out of context link bait.

~~~
jonpaine
Wow - he's getting a lot of hate. I'm not sure what exact strategy they
employed, but the typical way to play these to hide the theta is proxy plays,
not direct exposure (which would be killed by theta). The proxy is exposed to
the primary movement but also stands on its own in the absence of the desired
movement.

Everyone seems to hate on derivatives, but nobody can argue that they don't
provide the necessary granularity to exactly specify risk/reward profile of
the position you're looking to hold.

Who knows - maybe everyone here is right and they got creamed for 7 years
before making back 20%. My feeling is that the position was likely more
thoroughly built than that. Again - who knows - but just hating on it at face
value isn't doing anyone any favors in understanding the market and the way
informed investors articulate their desired position in it.

~~~
fixxer
I'm not hating on derivatives, just the notion that being long gamma is always
the best strategy. There is no best strategy.

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nerfhammer
They got a 20% return on 6 billion, more specifically

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sytelus
S&P returned 80% during past 5 years. In bull market Taleb's fund probably
didn't made any money so it might be safe to assume they made 20% total during
this 5 years. That doesn't sound spectacular.

~~~
eruditely
Why speculate? Just go check their annual returns.

~~~
jacalata
I thought they weren't public? Where would you look at them?

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tempestn
"“The markets are overvalued to the tune of 50%, and I’ve been saying that for
some time,” said Mr. Spitznagel"

I always enjoy quotes like that. I wonder if the markets have gained 50% over
the time he's been saying it.

~~~
graeme
I posted on another comment about quotes and may as well do so here: don't
trust a journalistic quote to be a verbatim representation.

Charitably, he might be saying that he long claimed markets were overvalued.
Only an idiot would claim that markets were constantly overvalued by 50% while
fluctuating all the time.

Unless you have a verbatim transcript, it's best not to assume that a stupid-
sounding quote was said literally as quoted.

~~~
tempestn
Agreed. I wasn't assuming he meant they were exactly 50% overvalued. More
making the general point that if you call for a correction in the markets long
enough, eventually you'll be right. Obviously anyone can look at valuation
metrics and compare them to historical averages (and I'm sure his analysis was
more advanced than that), but I'm pretty skeptical of anyone who claims they
have _actionable_ knowledge of the over- or under-valuation of the market.

------
et2o
How does it compare to the same amount of money put in VOO over the past 5
years?

------
JacobAldridge
Interesting that the article claims Monday's drop didn't take them by
surprise. My understanding of the fund's premise is that they make a small bet
everyday that today will be an abnormally large drop - most days they lose,
but every now and then they have a big win that more than covers all that
bleeding. In other words, they were probably just as surprised about Monday
and wouldn't have minded if it was Friday or Tuesday.

------
clamprecht
It is called a _hedge_ fund, after all.

------
eruditely
Universa is Spitznagel's fund right? I follow Nassim very closely and he is my
largest influence but I am just getting the facts straight here. He did say in
one of his interviews it has the same people as his old fund and he shut it
down due to throat cancer (empirica).

------
nosuchthing
...Bypass the paywall:
[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCsQqQIwAGoVChMItZrP7pXNxwIVDKSICh2C0w89&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fnassim-
talebs-black-swan-fund-made-1-billion-this-
week-1440793953&ei=6g7hVbX9BozIogSCp7_oAw&usg=AFQjCNGdc5pikq7MsbqirjONbbx5-xGHZg)

It's really frightening to know that the quickest, easiest way to make
millions of dollars gaming the stock market is just to bet on global financial
disasters, or bad news of companies, or crops failing.

~~~
nostrademons
Not really. It makes money now because it loses money _at all other times_ ,
and the reason why it's potentially profitable is because most people couldn't
stomach investing in a portfolio that is designed to lose money 99% of the
time.

~~~
contravariant
So basically you're just betting at 99:1 odds?

~~~
jessaustin
When you think you'll win 2% of the time, those are good odds.

~~~
theoracle101
This is not true at all and a common fallacy. See the gamblers attrition
problem (or double knockout options for this who want to see the only closed
form solution).

Essentially your wealth is path dependent. Though the expected value may be
positive, once you are ruined you cannot continue to play (or in this case)
invest anymore.

In math you could theoretically always bet (or invest) a fractional value of
your wealth, but not in the real world.

[https://en.wikipedia.org/wiki/Gambler%27s_ruin](https://en.wikipedia.org/wiki/Gambler%27s_ruin)

~~~
sokoloff
More relevantly (IMO), see:
[https://en.wikipedia.org/wiki/Kelly_criterion](https://en.wikipedia.org/wiki/Kelly_criterion)

There's a +EV (long run, even with finite starting bankroll) strategy readily
available under the stated conditions.

~~~
theoracle101
"The original meaning is that a gambler who raises his bet to a fixed fraction
of bankroll when he wins, but does not reduce it when he loses, will
eventually go broke, even if he has a positive expected value on each bet."

Yep, that is correct, but the kelly criterion requires fractional betting,
which at some point in the real world is not possible, especially with
options.

This is because there is a limited amount of options you can sell/purchase, so
the fractional bet will always decrease as your bankroll increases. And there
is also a floor where you cannot purchase below if your bankroll falls below
(though your investors would have wiped you out by than).

That is suboptimal

~~~
sokoloff
Agreed, suboptimal but only slightly at practical sizes of bankroll.

The Kelly criterion is about optimizing the speed of growth of your bankroll
when betting with an advantage, so it's still "safe" to round down.

My trading account is "nowhere near the size of Taleb's" (to put it mildly)
and I don't use his strategy, but I've never found that I wished for
fractional optional contract sizes. (I don't even use the mini-S&P options.)

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tedunangst
Curious how they did on Tuesday.

