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You only need a return like this 1 time in most cases... Nassim Taleb-Advised Universa Tail Fund Returned 3,600% in March

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.

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.

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.

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.

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.

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?

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?"

a. You should roll the calls either (a) after a full year has gone by and you can sell them for a long term gain instead of a short, or (b) after a large market decline to be able to participate in a market rebound. Item B merits discussion. One of the advantages of using long calls is as the market declines, so does the delta of the long position. When the position was opened, delta may be around .9 -- which means if the market drops $1, the long calls go down $0.90. However, as things decline, so does the delta. So after a crash, the delta might be 0.7. This means if the market keeps going down, your long position is declining at a decreasing rate, while your long puts have a delta near one. So in Leveraged Anchor, you're actually better off with a BIGGER crash, as your account can start going up in value. We saw this actually occur over the last month. The trade off is as markets rebound your account will go DOWN in value. This can be combated by, at some point during a decline, rolling the calls down and out to a higher delta. The disadvantages of such a move include (a) it requires cash, (b) you are realizing a loss on the calls while not realizing a gain on the puts, and (c) if the markets keep going down, you'll be worse off than if you had not rolled down and out. Of course the long puts are still there, but you will be a bit worse off. a. As for when to roll the puts, the general answer is only as things go up. I did post an article discussing when this may not hold true: https://steadyoptions.com/articles/anchor-analysis-and-options-r564/. b. We normally by the hedge of the long calls 5% out of the money. They're significantly cheaper than an ATM position. For instance, the March 31 2021 at the money put (280) is currently trading at $32. 5% in the money (266) is around 26.50. The first ends up costing the portfolio about 11.5%, the second 9.5%. So in essence we're "risking" a 3% down turn to get a cheaper hedge. Given the postive skew of markets over time, and the fact the biggest drag on the portfolio is the hedge, this is a tradeoff most members are happy with. Though some DO stick to the ATM hedge. But then we also have to hedge the short puts, which are the most risky portion of the portfolio. We use ATM puts for that to reduce risk. c. It depends on if its a new or old portfolio. For the older ones, for instance the model portfolio, we currently are hedging the short puts at SPY 327, which has a delta of almost one. So selling a 55 delta put has relatively low risk. The premium is huge (which is necessary to pay for the more expensive hedge), and the long 327 puts do an awfully good job of hedging it if the market goes down. If you're opening a new portfolio, yes the risk is higher, but you also need the higher credits to pay for the hedge. If you're risk adverse, you can always move toward the ATM position, but be more aggressive rolling. d. Cost, delta, and necessity for adjustments. On the long call side, your 435 day 200 call (first available after one year), is trading at an .88 delta, the same position 652 days out costs $3 more and has a .82 delta. Not the largest swing, but one that will make a difference in an up market. It also cost a bit more to get the same leverage. On the put side, the same thing applies -- only as we anticipate having to roll the hedge up and out as markets rise, by moving further out in time, you've cut the amount you can roll "up and out." e. When I purchase the options, I always open the order well off the mid in my favor. For instance, if I was buying a put and the spread was $1 - $2, I'd probably open the order around $1.25 or so and slowly increase it by a few cents every 30 seconds to a minute. f. You are 100% correct -- if vol stays where it is, then the increased volatility will make paying for the more expensive hedge simple. However, if vol drops back to normal levels in a short period, you'll be in trouble. Another thing to think of, as volatility drops, markets are likely going up -- which means you may have to roll the long hedge frequently (about every 7.5%-10% in market gains). This increases cost even more, while at the same time the credits you get are declining. I currently want to see the cost of the portfolio hedge at 8.,5% or lower to feel comfortable. There's no magic with that number, it's what I'm comfortable with, for those entering a new Anchor, at these levels, they may still be able to pay for the hedge. g. Target leverage is based on an individual's risk tolerances. More leverage equals more risk in small market drops. It also is more volatility, as prices will move more. It's fairly easy to find the differences different leverage will have using excel. Just build out the position with various amounts of leverage, and then calculate the value of the portfolio on various stock ending prices. h. SPY is more liquid and more representative of the whole market -- QQQ is tech slanted. If you have $200k or more, then you could implement a diverse Anchor using IWM, EFA, QQQ, and SPY. i. We've tried a variety of different hedging techniques and learned that any hedge that does not exactly mirror the underlying instrument results in tracking error at some point. For instance, at one time we tried a basket of stocks that we liked and hedged with SPY. Worked great until dividend stocks really under performed SPY and we were heavy in dividend stocks. We tried using a blend of similar instruments to SPY (SDY, RSP, and VIG), which, over the last 30 years or so, would have outperformed SPY in up markets and down markets. Until the last three years, in which case SPY outperformed them all and lagged. Similar on down turns. If you're not in the SAME instrument, there will be slippage. You might be ok with that depending on how much and the price. This is called "correlation," and if the two instruments do not have a HIGH degree of correlation, you risk under performance.