Nassim Taleb, The King of Long Volalitlity

[RapperT 336]

You only need a return like this 1 time in most cases...

 

Nassim Taleb-Advised Universa Tail Fund Returned 3,600% in March

 

 

 

 

[Kim 7,943]

Very interesting, thanks for sharing.

So they say "the fund returned 3,612% in March". And then: "Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index."

This is not exactly apples to apples comparison. I assume the fund itself would be losing money all years, but the mix is what makes it so attractive. It's some kind of hedge, but the one that doesn't lose in up markets.

Using similar terminology, we can say that the "hedging" part of the Anchor made over 1,000% in March. Of course this would be a bit misleading because it was part of a portfolio that had other components.

[RapperT 336]

The fund doesn't invest in the S&P so i don't think it's totally analogous.  Its definitely an insurance product of sorts and on its own saw a 3600% return in a single month.  Spitznagel was pointing this out as this is evidently  how many of the investors utilize the product.

 

Taleb says about his approach (Im paraphrasing) "if nothing happens, I make a little, If something happens, I lose a little, if something  big happens, I make a lot"

 

Though I wouldn't be surprised if Taleb is the exception and only trades in a manner focused on tail risk.  Who cares if small losses happens most of the time if you have enough large wins

 

 

 

 

[Kim 7,943]

They say that they recommend their customers 3% allocation in the fund. When Taleb says "if nothing happens, I make a little, If something happens, I lose a little, if something  big happens, I make a lot" - does he mean those are returns of the fund itself? I would be really interested to know what exactly the strategy is. Because if this is the case, why they recommend their investors only 3% allocation, and the rest in S&P 500? Investing in the fund as a standalone seems like a holy grail.

[RapperT 336]

From what I understand it was from an interview when asked about his approach.  I dont think he was referring specifically to this fund but im not sure.

 

You know better than most that most investors would never put up with years of small gains/small losses, especially during huge bull markets.  Im sure Universa approaches things the way they do so they can attract investors and generate fees. 

 

That said Im totally speculating about Taleb only employing tail risk strategies.  I have no idea what he does personally other than what he said in that quote.

 

 

[RapperT 336]

24 minutes ago, Kim said:

I would be really interested to know what exactly the strategy is.

Trust me I’ve been wracking my brain on this all morning.  Has to be primarily long options to generate those kind of returns in a month.  I think 

[rdr 19]

having known him a little over the years i can tell you it's not easy for him in the risk on years.  I havent seen the returns recently but have been closer to it in the past. and there have been some tough returns.  Remember if a fund is down 50% they have to be +100% to break even.  I'm not saying this is the case here but when you are long options you bleed.

[Kim 7,943]

When they are saying "96.7% in the S&P 500 and 3.3% in Universa’s fund would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index." - this is an excellent result, but don't forget that this period starts at the beginning of the 2008-2009 financial crisis, and ends at the period when indexes were down big time, and the Universa’s fund component had huge returns. I can assume that the Universa’s fund itself would be losing a lot during "normal" periods, otherwise why they recommend allocating only 3.3% in this fund?

[rdr 19]

exactly - timing is everything....

[RapperT 336]

Obviously the fund likely loses during periods of low vol but I dont think there's any evidence it loses a lot.  We dont know the return stream outside of last month.  Im going to do some digging and see what I can find.

 

Regardless, Taleb has a long history as an accomplished trader.  As @Jjapp recently said to me, hes not worth 100 mil from his writing.  He's not someone I would ever bet against in the long run.

[Kim 7,943]

Here is some data:

https://www.investopedia.com/news/black-swan-investors-lose-big-stocks-thrive/

"after hitting peak performance in September 2011, these funds have fallen by about 55%, according to data from CBOE Eurekahedge reported by the Journal."

[RapperT 336]

1 minute ago, Kim said:

Here is some data:

https://www.investopedia.com/news/black-swan-investors-lose-big-stocks-thrive/

"after hitting peak performance in September 2011, these funds have fallen by about 55%, according to data from CBOE Eurekahedge reported by the Journal."

thats lots of different funds.

 

Here's a recent investor letter from Universa.  I think we need to give some credit where credit is due

 

https://www.zerohedge.com/markets/black-swan-hedge-fund-advised-nassim-taleb-returns-3612-march

[Kim 7,943]

4 minutes ago, RapperT said:

thats lots of different funds.

 

Here's a recent investor letter from Universa.  I think we need to give some credit where credit is due

 

https://www.zerohedge.com/markets/black-swan-hedge-fund-advised-nassim-taleb-returns-3612-march

Of course. But we also need to put things in perspective. How the fund itself (not the 3%/97% mix) performed during "normal" years? They don't provide those numbers. The performance they mentioned included the huge gains in 2020 (4,144%), and probably some nice gains in 2008-2009. But if it was losing around 10% per year during normal years, someone who joined in 2010 wouldn't even have enough capital to enjoy that 4,144% gain. and again, if it is so good, why they recommend allocating only 3.3% to it?

[RapperT 336]

haha.  Man you are tough!

 

Who gives a crap if it loses single digits multiple years if it then returns 4000%!!! Come on!  The annual mean ROIC is 76% since 2008!  , Killing me Kim

 

edit for citation:

 

 

"Moreover, the standalone Universa tail hedge strategy’s life-to-date mean annual net return on invested capital (expressed as returns on a standardized capital investment since inception in March 2008, and using yours from your start date) has been +76% per year. (During this period, as a reminder, the SPX has gained 151%. Are we really such an “über-bearish” strategy?"

 

 

 

[todavidlee 0]

This begs the question, is the fund open to the public?

[Kim 7,943]

3 minutes ago, RapperT said:

haha.  Man you are tough!

 

Who gives a crap if it loses single digits multiple years if it then returns 4000%!!! Come on!  The annual mean ROIC is 76% since 2008!  , Killing me Kim

 

Because event like 2020 (35% down in just few weeks) might be a one in a lifetime event, and it might be another 20-30 years till the next one. As I mentioned, if you are losing money year after year, you might not have enough capital when an event like 2020 comes. IF it comes at all. You know what they say - more money has been lost in preparing to corrections than corrections themselves.

And again, why they recommend placing only 3.3% into it? 

[RapperT 336]

1 minute ago, Kim said:

And again, why they recommend placing only 3.3% into it? 

because even though the CIO seems to argue otherwise a bit in the letter, we should remember that funds like this are often designed to protect investors from the far left tail on the return distribution.  By definition thats what a tail fund is. 

 

  Also, as I said, Im sure it helps attract investors and generate fees when positioned as a smaller part of a bigger portfolio...

[Kim 7,943]

2 hours ago, RapperT said:

because even though the CIO seems to argue otherwise a bit in the letter, we should remember that funds like this are often designed to protect investors from the far left tail on the return distribution.  By definition thats what a tail fund is. 

 

  Also, as I said, Im sure it helps attract investors and generate fees when positioned as a smaller part of a bigger portfolio...

Exactly my point!! Nobody in their right mind would invest in this fund as a standalone fund. It's always a small portion of the overall investment.

While technically the fund did made those returns, advertising it that way is like saying that if you invested 1M in the fund on January 1st, you would have now $40M+. But nobody would invest it that way because most of the years you would be losing money big time. 

Another way to look at it is like us advertising that Anchor "hedge fund" made 1,000%+ because the hedge part (the long puts) increased in value 10 times. Nobody would do that because nobody would buy those puts as a standalone investment - they are part of a broad portfolio.

[Kim 7,943]

P.S. My comments don't mean in any way any disrespect for Nassim Taleb. He is one of the smartest people I know, and I have a tremendous respect for him. I just think that those headlines are misleading. Which is not surprising - the financial media was never interested in facts, it's more about ratings. Exactly like CNBC who host clowns like Cramer and Najarian brothers only because they are entertaining. 

[RapperT 336]

20 minutes ago, Kim said:

Exactly my point!! Nobody in their right mind would invest in this fund as a standalone fund. It's always a small portion of the overall investment.



 

haha.  Yes we are (mostly) agreeing.  Anyway, you gave Taleb his due so my work is done here

 

I never suggested anyone invest in it as a standalone fund!  I just said its very likely Taleb only trades this way

 

 

 

 

[Topcat 7]

Agree-you can go bankrupt if the return on other years are really negative if you put morethan 3%. I can't find returns for other years? can anyone else? 

Also I'm not sure how this would be different from buying SPY puts for long term stock portfolio insurance, say 15 to 20% below current levels or maybe even  putting a tiny % into 3x inverse funds. Essentially portfolio insurance would cost you a small % off the top of total returns over years but in the down years like 2008/2009 and recent it smooths things out-allowing you to stay invested.

I do like Universa's article on the "volatility tax" https://www.universa.net/riskmitigation.html

[Kim 7,943]

30 minutes ago, RapperT said:

haha.  Yes we are (mostly) agreeing.  Anyway, you gave Taleb his due so my work is done here

 

I never suggested anyone invest in it as a standalone fund!  I just said its very likely Taleb only trades this way

 

 

 

 

You mean that Taleb puts all his portfolio into Universa’s fund like strategies? I highly doubt it.
 

16 minutes ago, Topcat said:

Agree-you can go bankrupt if the return on other years are really negative if you put morethan 3%. I can't find returns for other years? can anyone else? 

Also I'm not sure how this would be different from buying SPY puts for long term stock portfolio insurance, say 15 to 20% below current levels or maybe even  putting a tiny % into 3x inverse funds. Essentially portfolio insurance would cost you a small % off the top of total returns over years but in the down years like 2008/2009 and recent it smooths things out-allowing you to stay invested.

 

Exactly.. no matter what any of those guys is telling us, there are only 2 ways to protect your portfolio: stock/index puts or VIX calls.

Familiar with 50 cents trader? Take a look:

https://www.cnbc.com/2018/02/12/the-mysterious-trader-nicknamed-50-cent-made-200-million-last-week-as-the-market-blew-up.html
https://www.reuters.com/article/us-usa-stocks-volatility/big-volatility-options-trade-points-to-mystery-investor-50-cent-idUSKBN1ZS0HW

The strategy involves buying next month OTM VIX calls around 50 cents. 

Now, if you bought those calls on Feb.1, this would be your return on March 16:



However, you would be losing the whole premium 95% of the time.

Same is true for far OTM puts. 

You spend maybe 2-3% of your portfolio on Universa’s fund like strategies, and it helps you to protect the portfolio during big drawdowns. But can you say that you made 4,000% (or 7,000% in case of VIX trader)?

btw, I implemented a similar strategy with SPX puts. This is how it looked on Mar.18:



(Posted on twitter on March 18 - https://twitter.com/SteadyOptions_/status/1240315512229376001) Some of them gained over 1,000-1,500%. But I never claimed to make those returns.
 

[RapperT 336]

@Kim yes, I think Taleb approach is focused mostly around tail strategies.  He talks about this all the time.  He acknowledges that he will have long stretches of unimpressive returns.

 

 

 

 

[Kim 7,943]

14 minutes ago, RapperT said:

@Kim yes, I think Taleb approach is focused mostly around tail strategies.  He talks about this all the time.  He acknowledges that he will have long stretches of unimpressive returns.

 

"mostly around tail strategies" is not the same as put the whole portfolio into those strategies. And "long stretches of unimpressive returns" is not the same as losing money 95% of the time.

There is no magic. Tail strategies are designed for a small part of your portfolio. They are lie lottery tickets. A strategy cannot make thousands percent of returns during crisis and make money during normal times. Even Taleb cannot do it. I would assume that he is putting a larger percent of his portfolio into those strategies compared to "average" investor.

Were you able to find returns of the Universa’s fund in "normal" years (excluding 2008-2009 and 2020)? 

[RapperT 336]

who said he’s losing 95% of the time in the fund?  So far I’ve only seen that suggestion here on the board. 
 

His approach has a long term positive expectancy.  Any strategy at all can lead to going broke unless that’s the case.  I don’t have a record of every trade he’s taking.   Maybe he’s buying and holding index funds. 

 

We can theorize about why it’s equivalent to buying spy puts ( with the implication being any dope can match his success) but the b*llshit filter in all of this is the fact that it’s been working for him for over 30  years and other “tail” funds haven’t seemed to produce same results.  If it were that easy than we should all be worth 9 figures.

 

Obviously people are welcome to think he’s full of shit.  I’m not claiming there is “magic.”  My point is that he’s a very talented trader with a long track record.
 

I haven looked any more results with this particular fund yet . More history on talebs trading career is easy to find online for anyone interested.

 

ill see what I can find and let you know. 

[RapperT 336]

For those interested, he talks about his “barbell strategy” in his books.  He doesn’t get into specifics but you can get an idea of his approach ( and also see that he’s not just buying puts).  He talks about being more heavily weighted in lower risk ( and lower return) trades  but always having exposure to More speculative trades that capitalize on tail risk.  
 

Been awhile since I read though so may want to check it out to get more detailed explanation. 

 

[Kim 7,943]

You are missing my point.

A standalone strategy that can produce over 3,000% in one month cannot make money in normal times. Period. By definition. 

And I never said he is full of shit. On the contrary - as I mentioned, I consider him one of the smartest people I know. And no, not everyone can produce same results. But he must be investing in a mix of strategies, including tail strategies. 

So let me clarify it one more time:

1. If you have $1M and put all of it into Universa’s fund on Jan.1 2020, you will have over $30M on March 30, 2020. But you would be losing money big time during normal years.
2. If you placed 3% of the same $1M into Universa’s fund and the rest into S&P 500 as they recommend, you would be flat in March, and outperform S&P in the long term.
3. Outperforming S&P over time by few percentage points per year while being hedged against catastrophic event is an excellent result - very few can do it. But it's not the same as making 3,000%+ during crisis on the whole portfolio AND being able not to lose much rest of the time.

[RapperT 336]

1.  You don’t know that.  You’re assuming that.  Taleb preaches non stop about protecting capital in between big moves. You’re also implying extreme moves /events  are super rare.  Theres a goood piece on his success on a single day during flash crash too ( I believe that’s what it was, will look.). You may be right that loses are big in normal years ( doubt it), but we don’t know.  I think it would be beneficial to read a bit about his approach because trades geared toward black swans make up ( or made up at one point) a small portion of his holdings.

 

2.  Not disagreeing.   That’s a fantastic result.  
 

3.  Also not disagreeing and haven’t in this entire thread. 
 

 

 

I was having fun with this earlier but it seems like you think I’m making an argument I’m not.  I think the only things we disagree on are whether or not the article title is misleading and if talebs fund loses big most of the time.  Hopefully we can find the year by year results.  Im certainly open to the possibility I’m wrong 

[Kim 7,943]

I would be glad to be proven wrong. But I think there is a good reason why they recommend placing only 3.3% into the fund.

[Jjapp 88]

I think there is an interesting side question that comes out of all of this.  Most portfolio theory is based on the idea of minimizing returns variance for some level of average returns.  Even some options pricing models use that idea when you loosen a lot of the standard BS assumptions.  People rarely question whether that is the right objective function for them.  Some people do argue that it is the wrong objective function (Munger, Buffett, Taleb all come to mind).  I'm not arguing with anyone on this thread but I am saying that sometimes we forget some of the fundamental assumptions in the models that support  the tools we use.  You can find a bunch you would probably question if you work through the derivations of CAPM etc.  I'm guessing you can put together an objective function where a huge percentage of your money in a tail risk strategy would make sense.  I've actually started messing around with this a bit.  Under 'x' objective function how should you invest?

 

 

On the actual trading strategy I think Hull talks about something in his market wizards interview that sounds like Taleb's barbell comments.  He talks about how he often shorted at the money options but maintained huge "explosion" positions.  Granted, I believe this was prior to the 87 crash so they were probably cheaper than but Taleb has posted some papers online recently showing that he thinks tail risk in options is still under-priced. 

 

 

Of course, all of this is only tangentially related to the debate here but it was fun reading and got me thinking.

Edited April 10, 2020 by Jjapp

[TrustyJules 3,212]

The story really is not impressive - this is a screenshot from my account with my European broker - I use them almost never because more expensive, less flexible and user friendly than TastyWorks. So there is a small sized budget there which was unused for most of the year but which in this volatility period I used for three trades. This is the quoted result:

Believe me I am not retiring for a life of cruises as Kim is planning to do - yes I made a buck but these return calculations are pretty misleading when taken out of a fuller context as has been pointed out.

[RapperT 336]

Haha, I was just point out that the fund had an impressive month.  

The thread is highlighting what has been a trademark of talebs career.  He has had a series of well documented monstrous wins going back to 1987 in which a single trade netted 40m dollars.  He achieves this success while only allocating 10-15% of his account to speculative long vol trades (this is my edit).  Knowing this, it is not irrational to believe hes able to preserve capital in between wins.

 

 

Edit for clarity

[Kim 7,943]

Billionaire investor Bill Ackman turned $27 million into $2.6 billion by betting that the coronavirus would tank the market

 

The mysterious trader nicknamed ’50 Cent’ made $200 million last week as the market blew up

There are more examples of "monstrous wins" by different traders. But in all cases, they were part of a bigger portfolios, usually a small part.

We are in a full agreement that Taleb is a very smart man and a great trader. This is not the point. As you pointed out yourself, he is probably allocating 10-15% of his account to tail risk strategies. Which was exactly my point all the way - this is not a standalone strategy. You cannot allocate your whole account to the strategy and still make money during normal times.

This is why I still believe the headline is misleading. But I enjoyed the discussion regardless. 😊

 

[RapperT 336]

47 minutes ago, Kim said:

We are in a full agreement that Taleb is a very smart man and a great trader. This is not the point. As you pointed out yourself, he is probably allocating 10-15% of his account to tail risk strategies. Which was exactly my point all the way - this is not a standalone strategy. You cannot allocate your whole account to the strategy and still make money during normal times.

😊

 

I think we are talking past each other at this point.

 

My last post wasnt really clear, so I see what you're saying.  In terms of his approach, my original statement was that, based on his interviews, Taleb likely exclusively trades in a manner that is focusing on taking advantage from tail events.  That doesn't mean he's only trading spx puts or vix options.  The other 85% of his portfolio exists for a reason and  doesn't contradict anything ive said.  To your point, I would be shocked if anyone they advise utilizes the same approach.  Its not really marketable imo.

 

Of course other traders have monstrous wins too.  I dont  think Ackmans success or the fact that trustyJules  had a good month takes away from the point of the thread!

 

Happy good Friday

 

I agree, fun chat.

 

 

[RapperT 336]

@Kim and @Jjapp, one interesting question I would have for taleb, is around the structuring of the low risk portion of his tail risk approach.  In the 80s, this allocation would probably be a lot more straightforward with interest rates were they were.  In conversations, folks always seem to focus on his long vol trades (as I was yesterday after I read the article).

 

He mentions his system has long term positive expectancy but I would imagine staying afloat during low vol period has become more difficult.  That said, i think there are "micro" corrections or vol spikes that occur in "normal" years that most probably dont consider when examining his approach.

 

 

[Jjapp 88]

I think you could do a bunch of things for "low risk" including appropriately sized systems but I'm not sure.  I'm guessing he isn't holding indexes but who knows.

 

On the options pricing in the tails he is one of the guys who rejects mean variance techniques for pricing and prefers other methods.  Here is something he posted previously on it.

Option_Pricing_Under_Power_Laws_A_Robust (1).pdf

[Alan 107]

I can see how Taleb, by either using far OTM SPX puts close to expiration or VXX calls in a similar way, could have generated 3600%. I backtested SPX using -4 Delta 2-4 DTE puts from 2/21 to 2/28, rolling 30 minutes before the market close each day back into  -4 Delta/2-4 DTE puts and trying to limit the trade to no more than 10% of the available open interest (therefore, requiring multiple strikes near 4 Delta & different expirations). Doing so generated 4,000%. However, if left on until the next trading day, the return dropped all the way down to 83%. So, getting in and out at the right time was critical.

 

However, I have no idea how Ackman went from $27 million to $2.6 billion. In the article link it says:

 

Pershing Square used credit protection on investment-grade and high-yield bond indexes to land the massive profits. The assets rise in value as the odds of corporate defaults increase.

 

What could he have used that jumped about 10,000% that had enough volume to accommodate such large amounts of capital?

By the way, in case you might be interested, that one week backtest if rolled each time the -4 Delta put reached -10 Delta intraday would have generated over 12,000% (but ending up at -13% if left on until the next trading day).

 

Edited April 12, 2020 by Alan

[Jevgeni 25]

@Alan which tools do you use to make such backtests?

[Alan 107]

10 hours ago, Jevgeni said:

@Alan which tools do you use to make such backtests?

I used OptionNET Explorer (ONE)

Edited April 12, 2020 by Alan

[Djtux 548]

On 4/11/2020 at 8:09 PM, Alan said:

However, I have no idea how Ackman went from $27 million to $2.6 billion. In the article link it says:

 

Pershing Square used credit protection on investment-grade and high-yield bond indexes to land the massive profits. The assets rise in value as the odds of corporate defaults increase.

 

What could he have used that jumped about 10,000% that had enough volume to accommodate such large amounts of capital?

By the way, in case you might be interested, that one week backtest if rolled each time the -4 Delta put reached -10 Delta intraday would have generated over 12,000% (but ending up at -13% if left on until the next trading day).

That's credit default swaps (CDS). It's like an insurance against the default of an underlying. The underlying could be a single name company like Wework, or it could be an index of a bunch of companies.

The CDS is swap with 2 legs and is quoted in "spread" but it could be seen as the fixed leg of a bond, and for the other side, it's the contingent leg which pays if there is a default in the underlying.

The CDS becomes 'more' expensive if the default probability is seen as higher.

Here Ackman saw that the cds spread (price) was at a low, when multiple people saw that the new virus was going to be a problem, and causing a shutdown of the economy, hence increasing the perception of a default of multiple companies. These instruments are not accessible for the rest of us.

Also go watch 'The big short' if you haven't, it's interesting giving the current context.

 

See https://pershingsquareholdings.com/wp-content/uploads/2020/03/Pershing-Square-Capital-Management-L.P.-Releases-Letter-to-Investors-March-26-2020.pdf

Quote

As a result, in February, the Pershing Square funds purchased credit default swaps (CDS) on various
investment grade and high yield credit default swap indices, namely the CDX IG, CDX HY, and ITRX EUR.
At the time of purchase, the IG or investment grade indices were trading near all-time tight levels of
about 50 basis points per annum. The high yield index, the CDX HY, was also trading near its lowest
spread ever. When one adjusts for the fact that a number of companies in the high yield index were on
the brink of default (and these near-default companies’ spreads were in the thousands of basis points),
the spreads on the rest of the companies in the index were actually well below the 2006-2007 all-time
lows.

 

[RapperT 336]

imagine if Taleb could get 2 and 20 for just buying some puts.  It's unlikely that's the case but it would be quite the accomplishment!  Ha!