Sunday, January 6, 2019

Tips And Tricks For Investing In 'End of the World Funds'

Alternative title: Where in the world is Dan McCrum?

Mr. McCrum stepped up to the plate as FT Alphaville's editor when Ms Kaminska was away and in addition to getting off some pretty good headlines—and an endearing glee when one of his editee's posts went over 100 comments—would also write stuff. We haven't seen his byline in a while, so here's a flashback:
First posted June 5, 2018
Tips And Tricks For Investing In 'End of the World Funds'
As unauthorized representatives for Long or Short Capital's End of the World Puts this is an area of profound interest from which we have gleaned some insight:
1) Should the world end, collecting on your bet can be a challenge. Know your counterparty!
     And possibly more important, demand collateral.
2) The swings in end of the world product prices can be dramatic.
3) Prognosticators have predicted 100,000 of the last 0 termination events.
As amateur scribblers we are adherents of the WaPo's Joel Aschenbach's dictum:
...When in doubt, go with the most hysterical headline.
(Rule one of blogging is that the End Of The World will be good for page views.)
Joel Achenbach, Washington Post
-World War Five
Although not a journalist I am affected by what they do, usually on a minute-to-minute basis, which gives one a real incentive to have what is admittedly a fuzzy (vague, incomplete etc) overview of what they-and other storytellers-are thinking about.
So I read stuff.
Last seen in 2017's "The end of the world is a growth industry."
With that, we'll turn it over to the professionals. Here's Dan McCrum writing at FT Alphaville:

Algebris has launched an 'end of the world fund'
Algebris Investments, the €12bn asset manager, has launched an “end of the world fund” pitched as a solution to the nagging fears of institutional investors that another financial-market meltdown or crisis might be overdue.

The fund will be run by Alberto Gallo, a popular investment bank strategist turned hedge fund manager, and will attempt to buy the equivalent of doomsday insurance through investments in credit, fixed income and equities which profit when those markets plummet or gyrate with unusual violence.
It was launched on June 1 with the backing of two large institutional investors and seed money from Algebris. The group expects the fund, officially called a “Tail Risk Fund”, to attract commitments of €100m to €500m in the coming months. The launch is a sign of investor jitters after years of global economic expansion, which might revive an investment strategy that became popular following the 2008 financial crisis.

The term “tail risk” comes from statistics, and refers to rare and extreme events that fall outside what is normally expected. Gallo, whose two-year old Macro Credit fund has €1bn of assets under management, told FT Alphaville the idea for the new fund came to him last year during a bout of late-night strategising with colleagues in Spain.

Widespread optimism made them think. “Last year, every trade worked out well, liquidity was plentiful, everyone was optimistic, so we started thinking about what could go wrong”, he said.
So the fund was conceived as a way to prepare for a possible shock to the financial system, after a decade of easy money and quantitative easing provided by central banks. It came to life after Algebris was one of several groups approached by large investors looking for investment strategies designed to limit losses to portfolios.

“They came to us and said, we want to trade against the crash and a big repricing, let's do the big short” said Gallo.

The challenge of such funds is that insurance is expensive, particularly when demand for it is high....MUCH MORE 
We are not fans of the typical black swan fund, even as a hedge. Like triple-leveraged inverse ETF's the concept sounds good but having the market's historical upward bias grinding against you can get wearying. Some day this will change but in the meantime here are some thoughts on Nassim Taleb:

More on Nassim "Black Swan" Taleb as a Money Manager
The day the Wall Street Journal broke the news of "Taleb Makes Hyperinflation Bet and Why You Might Want to Be Skeptical" there was a minor kerfuffle about a claim “...made $20 billion for our clients, half a billion for the Black Swan fund", reported in the British GQ. I didn't understand how that could be and instead chose to focus on his Empirica Kurtosis fund's performance.

We've been tracking Mr. Taleb for quite a while and the general summation is an ad I was going to write for him:
"Here at The PseudoProfound Group, we believe..."
Climateer Line of the Day: The Humble Mr. Taleb Edition
I was reminded of something Nassim Taleb said a few years ago:

CNNMoney: Did your personal portfolio benefit or suffer from the subprime crisis?

Taleb: I prefer not to answer that, as I am trying to avoid talking about my nonintellectual activities. 
And  now I can't stop laughing. ...
In 2010 it was "Oh Berkshire Hathaway Fans: "'Black Swan' Author Nassim Taleb: Warren Buffett May Just Be Lucky" (BRK.B; BRK.A)"
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.... 

...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)...
See also "More on Nassim "Black Swan" Taleb as a Money Manager"

2013's "Brian Eno Answers Nassim Taleb" begins with:
Mr. Eno is an autodidactic polymath.
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 Artangel:

From: Brian Eno, London

To: Nassim Nicholas Taleb, New York
30 April 2013

Dear Nassim,
And ends with a very nice cover of Mr. Eno's "Baby's on Fire"....

Now, on to tracking down Mr. Keohane...