Tuesday, February 1, 2011

Gray and Dirty Swans!

My opinion of Nicholas Nassim Taleb's "The Black Swan" is not particularly charitable. But you know, this guy put his philosophy into practice by running a hedge fund and making billions of dollars for himself and his clients. What do you say about that, huh?

I did not know this while I was reading the book, but it turns out that the magnitude of his exploits was  "somewhat" misleading.

NNTs investment strategy is very crudely speaking the opposite of the insurance business. That is, you continuously bleed money, with the expectation of making monster sized gains when an extremely low probability event (a Black Swan) occurs. The rationale behind the strategy is that the probabilities "we" assign to low-probability events (could be zero) are usually lower than warranted. That is, there is an  asymmetry between expected and empirical probabilities.

As Janet Tavakoli puts it:
The black swan fund's strategy is purportedly to buy out-of-the-money put options on stocks and broad market indices and hedge tail risk for clients. The strategy may produce long periods of mediocre--or even negative--returns followed by a large gain and vice versa. No one can tell you for certain exactly when (or for how long) large gains are possible.
She reports here that:
Taleb’s Empirica Kurtosis “black swan” fund had negative returns in 2001, the year of the 9/11 black swan event. Taleb later claimed he only called it a hedge fund “in May-Oct 2001.” Perhaps he meant something else, because Empirica Kurtosis wound up at the beginning of 2005 with lackluster returns , and performance specifics are not public, but it may have been a stranded swan.
She also discovered that when he was quoted as saying the following (in the aftermath of the present crisis), in an article in GQ fawning over his intellectual prowess:
I went for the jugular--we went for the max. I was interested in screwing these people--I'm not interested in money, but I wanted to teach them a lesson, and the only way you can do it is by trying to take it away from them. We didn't short the banks--there's not much to be gained there, these were all these complex instruments, options and so forth. We'd been building our positions for a while...when they went to the wall we made $20 bln for our clients, half a billion for the Black Swan fund.
he was actually being borderline deceitful. Upon being pressed NNT admitted that he really had made about 250-500 million dollars, and not the 20 billion which was his notional exposure.

Sure, whats a factor of 40 or 80 between friends?

But then, Jim Rogers, caught him on that as well. Making 0.25-0.5B on a 20B exposure is a 1-2% return, not the super-sized return you would expect for all the waiting and bleeding you've been doing.

In the linked articles, Janet Tavakoli also attacks his claim of having been one of the first to foresee the present crisis. What does she get in return? This hilarious stuff! He puts a big yellow post it note on the GQ story as posted on his webpage:
Note that NUMBERS are wrong. This is not a business/finance, but a philosophy article written by Will Self. So read the article for its ideas. Janet Tavakoli used the errors as a platform for her (failed) smear campaign.

I have very, very stupid enemies.
As Tavakoli says "he plays the victim and resorts to unwarranted name calling when asked legitimate questions."

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