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  • Taleb's own Black Swan  [Edit or Delete]5 comments
    Jun 22, 2011 9:41 AM

    Taleb rose to fame not only by coining the term ‘Black Swan’ in his aforenamed book, but his fund Universa returned 100% during the 2008 stock market crash using black swan trading methodologies when the overall market was down 20-30%. The way the fund works is most of the capital is designated to risk free assets like treasuries and only a small portion is assigned to out-of-money puts. If the market falls a lot (like what happened in 2008) his fund will make a lot of money exercising these options. Otherwise, he loses only a small amount of money when the options expire worthless.  His fund is able to tolerate small, repeated losses for a huge potential payday when a black swan materializes whereas traditional funds would be destroyed by the black swan. It seems like a great idea; many small losses and a few huge gains, but looking deeper Universa’s days may be numbered because there are black swans that not even Taleb has anticipated.

    In 1999 Taleb founded Empirica Capital "a tail hedging firm ... carrying an insurance-style strategy (now called "Black Swan Protection") aiming to protect investors from large adverse events". Tail hedging is essentially the same as buying an out-of-money put. Taleb closed Empirica in 2004 to focus on writing, and in 2007 he and a partner founded Universa to execute similar 'tail hedging' stategies. Between 1999 and 2007 these funds were able withstand daily small losses by collecting interest on the risk-free portion of the fund. Between 2003 and 2008 the stock market was remarkably stable which would have been bad for his puts, but short term interest rates were very high at around 4-5%. Nowadays, the markets are stable but short term interest rates are at zero as shown by the chart below with no hint whatsoever of them going up.


    Huge BRIC surpluses and quantitative easing programs are depressing rates, whereas just a few years ago interest rates would be on the way up at this stage of the recovery.  Permanently low interest rates not only help stabilize the stock market keeping ‘black swan’ events brief in duration and rare, but make it impossible to recover the small losses, and eventually these losses will add up to a substantial amount of money if a black swan doesn’t happen.

    Perhaps the lack of economic black swans and permanently low yields could technically be a black swan from the perspective of Universa. 

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  • I don't think they just buy puts. Based off his description of the strategy in the book, he tries to buy a variety of bets both bullish and bearish. Consider also that calls are generally much cheaper than puts even when the market is neutral or slightly bullish on the security.

    Consider the January 2013 $200 strike on SPY. Last contract went for $9. It takes a 49% rise (or approx 30.4% annualized) to get in the money by expiration. Assume its in the money by one month out, and that contract would go for around $310 based off current prices of the Aug, 2011. Also based off those prices, it would take getting within 10% of the money to get your $9 back. 5% out gets around $30.

    The point is to take part in as many wide moves as possible, in line with the belief that the markets are increasing becoming more volatile.
    6 Jul 2011, 02:54 PM Reply Like
  • According to the Malcom Gladwell book his fund buys far out of the money puts and calls and he loses money 99.999 percent of the time . The black swan events are supposed to compensate for the losers by proving a huge return.

    However, he's losing money everyday and without black swans or a means to replenish his fund he will fail.
    30 May, 09:07 AM Reply Like
  • "there are black swans that not even Taleb has anticipated."

    If you actually read any of his books, he never claims to predict Black Swans, nor does he advocate trying to predict them. He only wants to maximize his exposure to positive or negative Black Swans..
    1 Jun, 06:07 AM Reply Like
  • instead of buying one of his books you can get a better idea pf how the fund works based on the book by Malcom Gladwell titled What the Dog Saw

    the specific chapter is

    Blowing Up - How Nassim Taleb turned the inevitability of disaster into an investment strategy.

    It gives a concise summary . He allocates some small percentage of the fund for OTM pulls and calls and the rest for treasury bonds. in 2006 interest rates were at 5% , now it;s zero. So you have a new problem where taleb can't recoup his losses unless he either finds a more risky form of yield or places even smaller bets.

    No one can anticipate the black swans but the stealth, slow-motion black swans are another breed altogether that Even Taleb for all his smarts is outmatched.
    2 Jun, 12:07 AM Reply Like
  • So did you read any of his books? I guess a snapshot of his operating strategy described by Gladwell is good enough to write an article that is completely ignorant of Taleb's ideas.

    In a recent interview, he mentioned how he has moved his "safe" pool of assets to equities (cash rich and dividend paying) away from sovereigns because of the collapsing yields and the TBTF faith the market has in sovereigns. He does not share the market's faith in "safe" sovereigns.

    He repeatedly describes the idea of using OTM options (upside or down) to take advantage of volatility. A "barbell" strategy if you will. If the market is exceptionally volatile, his bets will pay off tremendously. If not, then his "safe" assets should cover the bleeding required for the strategy to operate. It is an insurance fund, not an investment fund. If this distinction is not understood, then all else is just jibber-jabber. Or think VC firms, a few winners pay for a lot of losers, but the winners are indistinguishable from the losers until they are not.
    3 Jun, 09:57 PM Reply Like
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