Taleb's Fund Raking It In As Black Swans Appear

Nassim Nicholas Taleb, author of the Black Swan, is using the impact of extreme events mentioned in the Black Swan to help the hedge fund he advises, Universa Investments L.P., benefit in October (see WSJ article). Separate funds in the Universa's Black Swan Protection Protocol were up between 65 percent to 115 percent in October alone. The fund has a strategy of buying far-out-of-the-money put options on stocks and stock indexes. Most of the time the fund will take small loses when nothing unusual happens, but occasionally a black swan even occurs (such as the recent 20% market decline in one month), causing the gains to be extraordinary. In addition to using deep out-of-the-money puts, the fund has a strategy of keeping more than 90% of its assets in cash or cash equivalents, and is believed to break even or only incur small losses while waiting for the next black swan event. The fund recently made huge profits buying cheap puts on the S&P 500 and AIG, with the S&P puts increasing in value over 50-fold. While profitable during times of extreme volatility changes, one has to wonder how often such changes and moves will occur. Even a previous fund that Taleb was involved with had to shut down in 2004 after lower volatility caused returns to suffer and investors to flee. But then again, a 50-fold increase in a few trades gives you time to wait for the next event. You just need to be patient, and of course, know where to look as you wait for the worst to happen. Easier said than done.