How to best prepare for black swan & other catastrophic events

actually, I just took a picture of a black swan on maui.

as for wc's question. I've been working with dotm backspreads for some time. for example, I sold an sp june 925x875 3x2 backspread for 6 tics some time ago. I just shut it down for 2 tics. this trade cost little to nothing, and theoretically would do well in an '87 event. one drawback is the credit will expand before making that profit though, another is you should not do this with front months. I'm still working this out though.


Quote from bellman:

Might be a little more likely occurrence than you think! The current global population of the Black Swan is estimated to be up to 500,000 individuals. Hence all this discussion.

http://en.wikipedia.org/wiki/Image:Black_Swans_Canberra.jpg
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Quote from Worldcrusher:

I manage a non-directional system that trades options on the Nasdaq 100 index that I am trying to use as the basis of starting a hedge fund. When I talk to potential investors one question that consistently gets asked is "how would your fund behave if some catastrophic event were to occur?" Many references are made to Taleb and his black swan concept as well as six sigma events. Examples given are a nuclear bomb explosions, terrorist attacks, etc.

It seems to me that there are only a few protective measures against something like this: 1.) be hedged 50/50 long and short, because ANY directional exposure (even 1%) could be enough to temporarily wipe out a fund, 2.) to go to cash as fast as possible if the market will permit it taking massive permanent losses, 3.) to have a highly diversified portfolio. Of these, the first two appear to be highly impractical.

Based on what I have seen historically, these events are extremely rare and while violent, very short in duration because something like this would go way beyond crippling an economic system, it would devastate the system of governance as well, and that can't be permitted if a country hopes to survive. There are safeguards in place to contain the damage.

Given this situation, what measures, other than those already listed above, can be taken to minimize such an event, especially for a fund that trades only one financial instrument? For those who have survived such events in the market, how did you manage it and what lessons did you learn? Also, for those fund managers out there, how do you address this question when asked by investors?

Any other thoughts or guidance are welcome.

Thank you for your consideration in this matter.

Sincerely,
Daryl
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I think that you may have missed the central question when you wrote "..can be taken to minimize such an event"?

The answer is to make sure that you have wings that will allow you to fly when winds of violent storms blow. If the latter sentence is quotable, I am the author of it and all rights are reserved.

BTW: what is your internal rate of return (geometric average not arithmetic averag, with a specification of the number of months).
 
Quote from riskfreetrading:

I think that you may have missed the central question when you wrote "..can be taken to minimize such an event"?

The answer is to make sure that you have wings that will allow you to fly when winds of violent storms blow. If the latter sentence is quotable, I am the author of it and all rights are reserved.

BTW: what is your internal rate of return (geometric average not arithmetic averag, with a specification of the number of months).
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Riskfreetrading,

As per Collective2, my compounded annual return (geometric extrapolation) is 28.6% over 316 days as of today. If you wish to verify this or reference further statistics regarding my system (called QQQQubert), the link is http://www.collective2.com/go/qqqqubert
and click on 'advanced' under the 'Statistics' section.

Thanks.

Daryl
 
Quote from robbie380:

let's be real worldcrusher....how much money are you actually managing?
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Robbie380,

Presently I am not managing any funds other than my own and that's not much to speak of. However, I am intent on changing that. :D

Sincerely,
Daryl
 
Quote from Worldcrusher:

Riskfreetrading,

As per Collective2, my compounded annual return (geometric extrapolation) is 28.6% over 316 days as of today. If you wish to verify this or reference further statistics regarding my system (called QQQQubert), the link is http://www.collective2.com/go/qqqqubert
and click on 'advanced' under the 'Statistics' section.

Thanks.

Daryl
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Thanks Daryl. I have never used collective2, but I visited it once. I will visit yours. The important thing in my view is to focus on a safe rate of return (not its magnitude).

Does being listed in collective bring any business?

As for myself, I trade options.

Best,

RFT
 
Quote from Worldcrusher:

Robbie380,

Presently I am not managing any funds other than my own and that's not much to speak of. However, I am intent on changing that. :D

Sincerely,
Daryl
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then don't worry about these kinds of events. they won't impact you. if and when they do happen just go with the flow and you will probably make more than you initially lost.
 
Quote from riskfreetrading:



Does being listed in collective bring any business?


Best,

RFT
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While the interest continues to grow, up to this point I have not generated any subscribers. It is my understanding that some system developers make US $12-14k per month from subscription fees alone.

However, being able to have my system performance statistically tracked by a non-biased third party and to be able to make those results public is of great value to someone such as myself attempting to start a hedge fund. Also, I think that on sites like Elitetrader, credibility is important and Collective2 enables me to substantiate myself as a trader. I highly recommend it!

Sincerely,
Daryl
 
Quote from robbie380:

then don't worry about these kinds of events. they won't impact you. if and when they do happen just go with the flow and you will probably make more than you initially lost.
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I agree with you totally, Robbie380. Unfortunately, anyone who has ever looked at my system in a serious way always hits me with this issue. Despite the fact that I point out that this system/fund should only be one of many in a well diversified portfolio which would remedy the problem, it is a constant sticking point.

Sincerely,
Daryl
 
Now that you've determined the alternatives, you are ready to make a choice. You can either
  • Market (and trade) your system as-is. Many customers will reject it, muttering "Black Swan Risk!!", but some will accept it. After all, you like this system a great deal; there must be a lot of other people who analyse its risk and reward the same way you do. Focus upon identifying those people and ignore everyone else.
  • Buy "Black Swan Risk Insurance" either through DOTM wings options or through Hedge Fund Insurance Companies. Accept lower returns in exchange for appealing to a wider customer base.
  • Abandon this system. Start over and develop another system which has an acceptably small "Black Swan Risk" as viewed by your intended base of customers. Long/short outright futures, long/short equities, ETF sector rotation, mutual fund market timing all seem to be good candidates, they are embraced in large numbers even by those who greatly fear "Black Swans."
 
Quote from Worldcrusher:

While the interest continues to grow, up to this point I have not generated any subscribers. It is my understanding that some system developers make US $12-14k per month from subscription fees alone.

However, being able to have my system performance statistically tracked by a non-biased third party and to be able to make those results public is of great value to someone such as myself attempting to start a hedge fund. Also, I think that on sites like Elitetrader, credibility is important and Collective2 enables me to substantiate myself as a trader. I highly recommend it!

Sincerely,
Daryl
More...

Thanks Daryl. I am also starting to think how to leverage trading knowledge and experience. I also think that marketing can add to your efforts. I read some interesting work on internet marketing. There are business models and tools for these things. Sometimes it pays getting more people to see the steak than to cook more steak and report on the quality of the steak. Some people even focus only/mainly on the sizzle, but we do not do that and we would not want to do that. After all no one should duck in ally out of shame for serving sizzly sizzle rather than the juicy steak.

Best,

RFT
 
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