Nassim Taleb and Empirica

I'm curious to know if this style of fund has grown in number over the past few years, and the effect that would have on the overall returns of those funds.

If too much money begins to bet on any one "black-swan" event, doesn't that ultimately reduce the catastrophic effect after that event occurs, given the amount of money already "discounting" it?
 
One element that seems perpetually overlooked when these discussions begin is the market's legislated baffling of extreme volatility. When selling options, I am often asked about catastrophic events and what I would do.

Since 1987, there has been an aggressive effort on the part of exchanges to mute sudden extreme volatility. Progressive curbs are now in place, and the exchanges have no problem closing for days to help reestablish investor confidence in the system, as with 9/11. Without these safeguards in place, Taleb's strategy would have a much greater chance of success.

As I understand it, Empirica has other investment methods that serve to counteract the constant bleeding, although Taleb makes no bones about educating potential investors about black swans.
 
Quote from illiquid:

I'm curious to know if this style of fund has grown in number over the past few years, and the effect that would have on the overall returns of those funds.

If too much money begins to bet on any one "black-swan" event, doesn't that ultimately reduce the catastrophic effect after that event occurs, given the amount of money already "discounting" it?
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The beauty of this technique is that it runs counter to the culture of Wall St.

No one wants to be constantly bleeding - human nature wants a constant stream of revenues, this is diametrically opposite.

So it is unlikely that long tail funds will get very popular. Then again, I don't know how much liquidity the market for long tails can bear, so it may just be that a few players will erase out the statistical advantage.

I think Cutten is on the right track of waiting for both 1) a comfortable margin of safety in the mispricing and 2) performing instability analysis (a la Sornette) to pick out good spots to put on positions.
 
As in most of trading timing is everything, a couple of posters here said that the key is in timing when to buy the tails. I personally know a couple of traders who put on cotton option tails past 3 months and made a killing. (i.e. six figure weeks). Why did they make a killing coz they bought cotton vol when cotton was ABOUT to explode basis chart patterns. At the same time I know coffee locals who are slowly bleeding past couple of weeks buying vol at x % only to puke it out 5% lower. so does buying tails work YES, is it the holy grail methodology ...no way!
 
In short, this whole thread is about trading curtosis. When to buy it and when to sell it. You should buy curtosis when you expect a lot of... well, curtosis. I think it is very tricky to price the wings (some younger academic types might disagree), so selling it in large quantities is dangerous (as it was proven in many cases). And, since you can't price em, they should be bought only in small amounts, which makes buying them not worth it.

However, I do agree with GA - if you time the wings properly, the volatility plays might be quite profitable.
 
Buying 2-3 sigma wingspreads with Tbill income is not a methodology, it's a position. I've never come across a public fund with a similar portfolio strategy -- in fact, I do no believe that Taleb trades public funds, maybe that's changed, but Empirica is not a hedge fund in a literal-sense.

IMHO, gamma trading with *wide* wingspreads is not a preferable strategy. You're not trading any real size on the underlying as the gamma doesn't leverage quickly. Far better off earning your gamma-debt on ITM premium.

His performance isn't publicly available -- I have an opinion as to why that is the case.

arb.

<happily short 300 SPX 1020puts// short futs>
:D
 
Well Ill be damned. This is the first time I have seen anyone do other than fawn over Schwagers books.

Quote from GATrader:[/There has got to be a middle ground between the polar opposites of Neidehoffer and Taleb's strategy. If I had to pick a side, I would side with Taleb since you can "amortize" our losses which can be paid for by gamma scalps. Trick is to discern when to put on the tail position. One of the traders in the stock maket wizards had a great discourse on this . This book by J schwager is 80% fluff save for a couple of traders inclu option trader who structures his spreads basis tech analysis.
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Quote from riskarb:
Buying 2-3 sigma wingspreads with Tbill income is not a methodology, it's a position. I've never come across a public fund with a similar portfolio strategy -- in fact, I do no believe that Taleb trades public funds, maybe that's changed, but Empirica is not a hedge fund in a literal-sense.
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Well, i have done it as a part of a contigent asset spread - go short on OTM reciever swaptions and long on OTM treasury puts. I have also seen OTM Tbill vs OTM Tbond options plays as an attempt to capture the curve slope changes. But i do agree that as a stand-alone strategy it is a waste of time.
 
The success of a strat like Taleb's hinges on diversifying over as many asset classes as capital (or liquidity) allows. Something in the world is always moving. Whether those black swans offset the pigeons is of course disputable. But catching an autumn of 2003 move in Soybeans, Live Cattle, or Cotton offsets a lot of worthless expirations.
 
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