If it takes you six years of buying out-of-the-money puts for your 20% day to arrive, your annualized gain suffers.
From the Wall Street Journal:
A ‘Black Swan’ Fund Made $1 Billion This Week
As market collapsed, hedge-fund firm Universa Investments gained roughly 20% on Monday
The recent market rout caught some star Wall Street traders by surprise. But not a hedge-fund firm affiliated with “The Black Swan” author Nassim Nicholas Taleb, which gained more than $1 billion on a strategy that seeks to profit from extreme events in financial markets.
Universa Investments LP was up roughly 20% on Monday, according to a person familiar with the matter, a day when the Dow Jones Industrial Average collapsed more than 1,000 points in its largest intraday point decline. The blue-chip index finished down 588 points on the day.
The fund’s returns for the year climbed to roughly 20% through earlier this week, this person said. Universa holds positions designed to protect about $6 billion in client assets, according to people familiar with the firm.We've been tracking Mr. Taleb for quite a while and the general summation is an ad I was going to write for him:
“This is just the beginning,” said Universa founder Mark Spitznagel, referring to the market volatility this week. His longtime collaborator, Mr. Taleb, who advises Universa, is a professor at New York University and is known for his pessimistic forecasts on the global economy.
“The markets are overvalued to the tune of 50%, and I’ve been saying that for some time,” said Mr. Spitznagel, who has spent the past several years warning of a coming correction he viewed as inevitable given the easy-money policies by central banks around the world.
Miami-based Universa and other “black swan” hedge funds that seek to reap big rewards from sharp market downturns emerged as winners amid the world-wide volatility of the past week, according to investors.
These funds “so far this month have been very strong,” said Gregg Hymowitz, founder of New York-based hedge-fund investor EnTrust Capital Inc., who has invested in several such funds since 2011. “If your house burns down, you want to have some protection.”
The funds’ nickname refers to the long-held belief that all swans are white, proved false when European explorers found black swans in Australia. In finance, a black-swan event refers to something extreme and highly unexpected, like the financial crisis. Mr. Taleb popularized the term in his best-selling 2007 book.
Some funds racked up double-digit percentage gains in the past week, largely on Monday. Capstone Investment Advisors LLC is up 52%, or nearly $100 million, for August through Wednesday, nearly all of it coming from gains last Friday through Tuesday, according to a person familiar with the matter. Black Eyrar, a fund of London-based 36 South Capital Advisors LLP, was up in the double-digit percentages for August through Friday, according to a person familiar with the fund. A similar fund at Boaz Weinstein’s Saba Capital Management LP was up 14% for August through Friday, according to an investor, bringing its returns for the year to 1%.
“We wait for times like these,” said Jerry Haworth, 36 South’s co-founder and chief investment officer.
Black-swan funds came into vogue in the years after the financial crisis, as concerns mounted about another recession, a potential increase in interest rates by the Federal Reserve and a European crisis, investors said.
Their strategies aren’t an easy sell to prospective investors because the funds tend to lose money steadily for several years before making a profit. Some critics said they can be too expensive and lead clients to pull out at the wrong time.
Universa, which was founded in 2007, first attracted attention for its outsize gains in 2008, racking up more than 100% profits for many of its clients.
It profited in 2010, and in 2011 it notched gains of about 10% to 30% for clients. In other years, it has lost small amounts of money.
The firm focuses on finding cheap, shorter-dated options on the S&P 500 and other instruments it expects to rise in value amid a notable downturn. During the past week, the value of put options that Universa bought over the past one to two months jumped, said people familiar with the matter. A put option confers the right, but not the obligation, to sell a security at a specified price, usually within a limited period.
Mr. Spitznagel, a former Chicago Board of Trade pit trader who worked at the proprietary-trading desk of Morgan Stanley, described Monday’s fall as a “blip” compared with what could still happen, though he said it was unusual because of the speed of the decline and its timing so close to market highs....MORE
"Here at The PseudoProfound Group, we believe..."See for example this 2013 re-post of a snip from 2009's "Taleb Makes Hyperinflation Bet and Why You Might Want to Be Skeptical":
Climateer Line of the Day: The Humble Mr. Taleb Edition
I was reminded of something Nassim Taleb said a few years ago:In 2010 it was "Oh Berkshire Hathaway Fans: "'Black Swan' Author Nassim Taleb: Warren Buffett May Just Be Lucky" (BRK.B; BRK.A)"
CNNMoney: Did your personal portfolio benefit or suffer from the subprime crisis?And now I can't stop laughing. ...
Taleb: I prefer not to answer that, as I am trying to avoid talking about my nonintellectual activities.
How to keep your name in the headlines by making a sophomore statistical point (sample size, error bars, confidence levels)....That Hyperinflation post has some amusing analysis of Taleb's prior fund, Empirica Kurtosis LLC. Here' one bit:
...So after the fund starting grinding out losses, Nassim started calling his fund a 'hedge', not a fund, later, a 'laboratory'. Now he says about the fund:"Our aim was not to make money,'' Taleb says....See also "More on Nassim "Black Swan" Taleb as a Money Manager"
...But he makes sure any article that mentions his fund notes he made 60% in 2000. The only record of his total fund was a WSJ article on him in 2007, which notes he lost money in 2001 and 2002, made single digits in 2003 and 2004. That averages out to around 12%, and as the risk free rate was about 4% over that period, and the volatility was probably around 17% on a monthly basis, thats a Sharpe of 0.47. Not so good. And that's with his unaudited returns, so it's probably biased high (people have a tendency to round unaudited results upward significantly)...
2013's "Brian Eno Answers Nassim Taleb" begins with:
Mr. Eno is an autodidactic polymath.And ends with a very nice cover of Mr. Eno's "Baby's on Fire".
Mr. Taleb is a comedian:
Climateer Line of the Day: The Modesty of Nassim Taleb Edition
Big 'ol HT up front to Abnormal Returns.
From: Brian Eno, London
To: Nassim Nicholas Taleb, New York30 April 2013
Possibly also of interest:
Black Swans and Greenspan
Taleb's World: "Knowledge is (not) Good"
Nassim 'Black Swan' Taleb Is a....[fill in blank]
Why is Nassim Taleb So Venomous on Twitter?
Taleb Calls For LTCM Pair To Lose Nobel Prize
Holy Cow, Is This a Paragraph or What? (Poor Nassim Taleb Never Stood A Chance)
By Joseph Cotterill (his ranting gets raves):...
And many more, use the 'search blog' box, keyword Taleb.