Nassim Taleb's “Black Swan” Fund Made 1 Billion On Monday(wsj.com)
wsj.com
Nassim Taleb's “Black Swan” Fund Made 1 Billion On Monday
http://www.wsj.com/articles/nassim-talebs-black-swan-fund-made-1-billion-this-week-1440793953
14 comments
Your source on [2] says GQ made a mistake. It doesn't say Taleb actually made the claim. The headline of the business insider article doesn't match the article's content.
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.
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.
"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.
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.
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.
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.
The article actually does say this amounts a 20% YTD return so far, which is a lot better than the performance of other prominent hedge funds... that seem to have a lot of minus signs for entities that supposedly "hedge" market drops:
http://i.imgur.com/ltjqLxW.jpg
http://i.imgur.com/ltjqLxW.jpg
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"?
How funny you should mention that. That's what Goldman did with AIG. AIG sold puts on basically the entire US housing market. GS, et al, were on the other side of this trade.
If AIG couldn't pay off, effectively Goldman's house is burning down, but their fire insurance company (AIG) has just gone broke. That is, until the US Government bails out AIG (and by extension Goldman).
GS has argued that they didn't need AIG b/c they were flat exposure to AIG. Technically, this may have been true, but unlikely. In any case, if AIG went under other folks who owed GS money would not be able to pay because AIG could not pay (and AIG owed everyone money). So really GS was very much tethered to AIG.
But you do bring up a good point. It's very difficult to make money betting on the end of the world, because if the world ends, who will be around to pay you. For these reasons, central governments/banks have been the underwriter of end of the world insurance through their lender of last resort functionalities.
If AIG couldn't pay off, effectively Goldman's house is burning down, but their fire insurance company (AIG) has just gone broke. That is, until the US Government bails out AIG (and by extension Goldman).
GS has argued that they didn't need AIG b/c they were flat exposure to AIG. Technically, this may have been true, but unlikely. In any case, if AIG went under other folks who owed GS money would not be able to pay because AIG could not pay (and AIG owed everyone money). So really GS was very much tethered to AIG.
But you do bring up a good point. It's very difficult to make money betting on the end of the world, because if the world ends, who will be around to pay you. For these reasons, central governments/banks have been the underwriter of end of the world insurance through their lender of last resort functionalities.
Nassim Taleb buys options whose counterparty has multiple ways of hedging,
Suppose Taleb buys a put on SPX (S&P500 index) from an counter-party with a strike price of 1880, most prudent counter-party would re-hedge themselves by spending some of Taleb's premium to buy a cheaper SPX at a strike price of 1800.
Alternatively, the counterparty might put on dynamic hedge; meaning if SPX drops and it gets closer to Taleb's strike price, the Taleb counterparty will have to rush out and also short number of shares of SPX proportional to the option's pricing's sensitivity to the SPX, otherwise known as the delta of the option contract.
Suppose the counterparty didn't hedge properly or the market was super-volatile like this week Monday and counterparty didn't act fast enough to hedge and is brankrupt; then usually the counterparty's broker has to steps in (e.g., Charles Schwab or TDAmeritrade for retail investors or a huge investment bank's brokerage services for a hedge fund).
Suppose the trade is so huge that the broker defaults (e.g., when Swiss Franc de-pegged and blown up lots of retail forex accounts and forex brokers), each broker also has to go through a clearing broker who are the third-level of guarantor of the option contract; the two biggest one's for equity and options markets in US are Goldman Sachs Execution Services and Apex Clearing. Their sole job is to maintain a huge account of cash proportional to the trades they settle in case of settlement issues.
Now suppose the GSEC and Apex defaults also; then I'm not sure anymore, I'm guessing that the guarantee responsibility falls upon the charter members of the option or equity exchange - the burden of debt is distributed to the member of the exchange (brokers, banks). If all the exchange collective members go bankrupt, then I guess at that point, that means collecting your option payment would be your least problem...
Suppose Taleb buys a put on SPX (S&P500 index) from an counter-party with a strike price of 1880, most prudent counter-party would re-hedge themselves by spending some of Taleb's premium to buy a cheaper SPX at a strike price of 1800.
Alternatively, the counterparty might put on dynamic hedge; meaning if SPX drops and it gets closer to Taleb's strike price, the Taleb counterparty will have to rush out and also short number of shares of SPX proportional to the option's pricing's sensitivity to the SPX, otherwise known as the delta of the option contract.
Suppose the counterparty didn't hedge properly or the market was super-volatile like this week Monday and counterparty didn't act fast enough to hedge and is brankrupt; then usually the counterparty's broker has to steps in (e.g., Charles Schwab or TDAmeritrade for retail investors or a huge investment bank's brokerage services for a hedge fund).
Suppose the trade is so huge that the broker defaults (e.g., when Swiss Franc de-pegged and blown up lots of retail forex accounts and forex brokers), each broker also has to go through a clearing broker who are the third-level of guarantor of the option contract; the two biggest one's for equity and options markets in US are Goldman Sachs Execution Services and Apex Clearing. Their sole job is to maintain a huge account of cash proportional to the trades they settle in case of settlement issues.
Now suppose the GSEC and Apex defaults also; then I'm not sure anymore, I'm guessing that the guarantee responsibility falls upon the charter members of the option or equity exchange - the burden of debt is distributed to the member of the exchange (brokers, banks). If all the exchange collective members go bankrupt, then I guess at that point, that means collecting your option payment would be your least problem...
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.
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.
> The article is behind a paywall
Just copy-paste the article's title in google, then click it and the paywall disappears.
Just copy-paste the article's title in google, then click it and the paywall disappears.
You can structure an options strategy so that you get the money up front, eg selling calls. And exchange-traded options are settled through the exchange, which is more neutral than a specific counterparty.
It does get more complicated as you pursue more sophisticated strategies though.
It does get more complicated as you pursue more sophisticated strategies though.
1 billion minus a rediculous amount of theta and gamma during the entire bull run. Meh. Out of context link bait.
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.
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.
I'm not hating on derivatives, just the notion that being long gamma is always the best strategy. There is no best strategy.
They got a 20% return on 6 billion, more specifically
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.
To put this into context, the S&P returned -3.4% YTD, whereashis fund returned 20% YTD. That is actually pretty spectacular compared to the performance of other prominent hedge funds (which are supposed to "hedge" against market drops): https://news.ycombinator.com/item?id=10139552
Do you have any data at all to back this up, or are you speculating for emotional reasons?
Oh, "probably". Got it.
Taleb is very smart and very practical. I doubt he falls into the perma-bear trap. Even Japanese equities have had long positive runs that have not been worth fighting during their brutal bear market.
Oh, "probably". Got it.
Taleb is very smart and very practical. I doubt he falls into the perma-bear trap. Even Japanese equities have had long positive runs that have not been worth fighting during their brutal bear market.
"“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.
I always enjoy quotes like that. I wonder if the markets have gained 50% over the time he's been saying it.
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.
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.
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.
How does it compare to the same amount of money put in VOO over the past 5 years?
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.
It is called a hedge fund, after all.
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).
...Bypass the paywall: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
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.
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.
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.
This fund is designed to appeal to people who believe the world is going haywire "any moment now!". That kind of sales pitch of expecting the apocalypse all the time has historically been quite successful, never mind the actual apocalypse frequency.
So basically you're just betting at 99:1 odds?
When you think you'll win 2% of the time, those are good odds.
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
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
More relevantly (IMO), see: 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.
There's a +EV (long run, even with finite starting bankroll) strategy readily available under the stated conditions.
"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
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
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.)
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.)
Those are still good odds and given enough bankroll you will win. Which of the cases in the article do you think disproves that?
"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."
When you're selling deep out of the money puts you can't just assume there will be a buyer to satisfy the fractional betting condition mentioned by the author in the (theoretically correct) kelly principle.
When you're selling deep out of the money puts you can't just assume there will be a buyer to satisfy the fractional betting condition mentioned by the author in the (theoretically correct) kelly principle.
Who said anything about raising bets?
The optimal betting strategy would be to "invest" a fractional percentage of your bankroll. See the kelly criterion from above.
Not doing so is suboptimal
Not doing so is suboptimal
Sure. But you said "This is not true at all and a common fallacy". In fact, it is quite possible to reliably win when the odds offered are better than the actual odds.
I guess we're just talking over each other - you made an assumption that I don't believe was clear from the context.
I guess we're just talking over each other - you made an assumption that I don't believe was clear from the context.
this is really nothing other than very straight forward "Insurance". In the long run, the optimists almost always win. Keeping money sitting idle and constantly rolling short dated put options is not a particularly sophisticated trading strategy.
Why should a trading strategy be "particularly sophisticated" ? I'd settle for terribly boring and profitable.
It's unlikely that a terribly boring strategy will in fact be profitable. (Comparatively speaking.)
I don't think there is any correlation between exciting/boring and profitable. Index funds ar one of the more profitable strategies (as they don't involve paying some guy a ton of money to play lotto for you). They are certainly boring. Taleb argues that people Investing are really bad at estimating the value of catastrophic failure (or blowout success) and invests accordingly. He is playing the other side of Y combinators strategy, very much in agreement with Fred Wilson, Y combinator etc, just the other side of the spectrum.
Er, well, sharpe ratio and all that. The existence of a risk free investment that pays better than the risk free rate would be quite the discovery (certainly not boring!).
Sure, but the trader from the article is just a single person with millions.
How many other traders out there look forward to bubble bursting events like this? Commodity disasters? Oil disasters and shortages? The whole "dumb money" (retail trades, casual investments, passive investment funds) vs "smart money" (day traders, hedge funds, insider traders, HFT) would lead me to believe that it's beneficial to exploit the excessive pumping up and bursting of financial bubbles, as it only siphons up 'dumb money'.
How many other traders out there look forward to bubble bursting events like this? Commodity disasters? Oil disasters and shortages? The whole "dumb money" (retail trades, casual investments, passive investment funds) vs "smart money" (day traders, hedge funds, insider traders, HFT) would lead me to believe that it's beneficial to exploit the excessive pumping up and bursting of financial bubbles, as it only siphons up 'dumb money'.
Well consider that the S&P 500 doubled in the last 5 years. Then consider that those are the stock returns, which doesn't mention the dividends which have averaged about 2%, so add another 10% to that.
Meanwhile he made a 15-20% return, on a twice in a decade type of event, and isn't making public his annual returns every other time. (take a wild guess why?)
In short, not incredibly impressive.
Beyond that, consider why he makes money when there is a financial disaster? Because they act as some form if insurance on economic downturns, basically. A ton of it is bad (i.e. when the whole world profits by burning it down, you've got the wrong incentives!), but some of it can be quite healthy.
Not seeing anything frightening about that, but it all depends on what measure.
Meanwhile he made a 15-20% return, on a twice in a decade type of event, and isn't making public his annual returns every other time. (take a wild guess why?)
In short, not incredibly impressive.
Beyond that, consider why he makes money when there is a financial disaster? Because they act as some form if insurance on economic downturns, basically. A ton of it is bad (i.e. when the whole world profits by burning it down, you've got the wrong incentives!), but some of it can be quite healthy.
Not seeing anything frightening about that, but it all depends on what measure.
2008, 2010, 2011, and the recent events stemming from the Chinese markets seems like more than just twice in a decade.
Also, correct me if I'm wrong but day traders / short sellers aren't obliged to keep the stock positions for any length of time.
I just find the phenomena interesting in context of financial bubbles, as the largest financial traders are incentivized to exploit instability of markets, and would be eager to create bubbles for the inevitable pop and profits on the plunges.
Also, correct me if I'm wrong but day traders / short sellers aren't obliged to keep the stock positions for any length of time.
I just find the phenomena interesting in context of financial bubbles, as the largest financial traders are incentivized to exploit instability of markets, and would be eager to create bubbles for the inevitable pop and profits on the plunges.
Curious how they did on Tuesday.
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curiousjorge(1)
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-... [2] http://www.businessinsider.com/wait-before-you-invest-in-nas... [3] http://www.wsj.com/articles/SB124519615631521063