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Nassim Taleb's “Black Swan” Fund Made 1 Billion On Monday
- nosuchthing 11y ago...Bypass the paywall: 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 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.
- lnlyplnt 11y agothis 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.
- dxbydt 11y agoWhy should a trading strategy be "particularly sophisticated" ? I'd settle for terribly boring and profitable.
- tedunangst 11y agoIt's unlikely that a terribly boring strategy will in fact be profitable. (Comparatively speaking.)
- jib 11y agoI 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.
- tedunangst 11y agoEr, 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!).
- nosuchthing 11y agoSure, 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'.
- nostrademons 11y agoNot 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 11y agoSo basically you're just betting at 99:1 odds?
- jessaustin 11y agoWhen you think you'll win 2% of the time, those are good odds.
- theoracle101 11y agoThis 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 11y agoMore 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 11y ago"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
- IkmoIkmo 11y agoWell 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.
- nosuchthing 11y ago2008, 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.
- curiousjorge 11y agoas a long time fan on Taleb, this makes me smile. take that you non believers! edit: what. why the downvote. I made money betting market would fall as well.
- delish 11y ago> why the downvote. I made money betting the market would fall as well. Bully for you. But you're being downvoted because your comment is cheerleading ("take that you nonbelievers!") without information or commentary.
- curiousjorge 11y agobig fucking deal
- fixxer 11y ago1 billion minus a rediculous amount of theta and gamma during the entire bull run. Meh. Out of context link bait.
- jonpaine 11y agoWow - 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 11y agoI'm not hating on derivatives, just the notion that being long gamma is always the best strategy. There is no best strategy.
- nerfhammer 11y agoThey got a 20% return on 6 billion, more specifically
- eruditely 11y agoUniversa 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).
- et2o 11y agoHow does it compare to the same amount of money put in VOO over the past 5 years?
- clamprecht 11y agoIt is called a hedge fund, after all.
- codexon 11y agoI 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"?
- fiatmoney 11y agoYou 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.
- c3534l 11y agoIf 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 11y ago> 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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- sytelus 11y agoS&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.
- carsongross 11y agoDo 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.
- eruditely 11y agoWhy speculate? Just go check their annual returns.
- deleted 11y ago[deleted]
- jacalata 11y agoI thought they weren't public? Where would you look at them?
- randomname2 11y agoTo 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 https://news.ycombinator.com/item?id=10139552
- tempestn 11y ago"“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 11y agoI 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 11y agoAgreed. 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.
- tedunangst 11y agoCurious how they did on Tuesday.
- Animats 11y agoHis 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-funds-have-their-day-in-the-sun/ http://blogs.reuters.com/felix-salmon/2011/08/11/black-swan-... [2] http://www.businessinsider.com/wait-before-you-invest-in-nassim-talebs-new-fund-2009-6 http://www.businessinsider.com/wait-before-you-invest-in-nas... [3] http://www.wsj.com/articles/SB124519615631521063 http://www.wsj.com/articles/SB124519615631521063
- graeme 11y agoYour 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.
- fauigerzigerk 11y agoBut 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.
- deleted 11y ago[deleted]
- JacobAldridge 11y agoInteresting 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.