Ok, I'm sure you guys are familiar with Empirica Capital and its strategy of t-bills and using the coupons to buy long options. Ok, let's say that for $1 million, EC pulls in 45k a year income, a 4.5 percent return. And lets say that spreading his bets, he doubles that or even triples it one year. Wow that like a 9 percent to 13 percent return. Ok, I guess. And quite good given the market risk on the downside - nil. (Forget inflation, bond market crash, etc. for a second.) But if this is a good year and there are many years where they entire 45k is frittered away on options that expire worthless, what kind of long-term gain are we talking here? Like merger arb returns, slightly better than bonds? Is this fund just for people loooking to diversify, correlate away, preserve capital and get lucky occassionally? I fail to see how this could generate substantial positive returns over time. Anyone know the details of what Taleb does and what his returns are like?
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taleb question
- Thread starter nravo
- Start date
the fund has been terminated, and he is on sabatical.
Here you go:
NNTâs Sabbatical from Empirica
People keep asking me why I am taking a sabbatical. Facts: I returned between 300M and 400M to investors under the official reason of âwanting to take a sabbaticalâ (in fact we turned down cumulatively an equivalent sum over the past two years as Empirica rarely took funds under the protocol). âSabbaticalâ has the Semitic root Shin-Bet-Aleph, possibly the same origin as âsevenâ âmy last sabbatical ended exactly six years ago; is there a magic number?. Project: âto do pure thinkingâ for close to a year; completely stripped of any active business obligations to investors, free to trade Empiricaâs portfolio in what manner I wish and not trade for as long as I feel[1].
There is something beyond the mere self-granting of a sabbatical. I found it exhilarating to return the funds to their owners for no particular reason, nothing other than this feeling of control (few people have the guts to tear themselves away from something, they wait for events to control their choices). As a Stoic I should accept that the feeling of being in control of oneâs environment (making the random internally more deterministic) does not require such action ( a true Stoic would find it repelling to earn money beyond oneâs own subsistence but thatâs another discussion); but, as a human being endowed with a hormonal system, I feel elation at exercising my own choices. Walking away from money (albeit temporarily) is far more elevating, and, even in the narrowly hedonic sense, it is far preferable to striving for it âjust like inverse greed. Saying âenough for meâ gives a different feeling than being told âenough for youâ. Someone explained to me that turning down âsuch free moneyâ is like throwing money in the garbage can, which might be right for a neoclassical economist, but not for someone who knows something about human nature. Kahneman and Tversky studied the âloss aversionâ ingrained in humans: a loss is not (both qualitatively and quantitatively) the same as a negative profit, an error by commission is not the same as an error by omission (preventing deaths is not the same as saving lives); to that I have to add that money turned down is not the same as money given away. This is the topic of the third volume of the uncertainty trilogy, which I find more fun to write than The Black Swan [2] (mostly because of the return of Nero Tulip). The subject is about Stoicism, and the inseparability of utility and probability (i.e., chance and happiness are too intertwined). This merges the philosophies of randomness with the new topics of economics of happiness and neuroeconomics (title: Chance and the Logic of Happiness --my focus in on a nonhedonic, even antihedonic theory of happiness).
A few details about Empirica âtime for revelations. Reading external descriptions of our activities was a great source of amusement at Empirica, particularly when people made assertions with great confidence while having no notion of what our business was about, how much we had under management, and what we did with it. This went on for close to 6 years. Clearly, the author of Fooled by Randomness is not going to be stupid enough to play the âhedge fundâ game âcompeting with spurious survivors, or having your track records examined by Sharpe ratio slow-thinkers who do not realize that the world is not Gaussian. Our tactic was to initially turn down investors with the polite âthis is not for youâ. We only accepted those investors who, aware of fat tails, insisted on Black Swans protection under our rigid protocols and were committed to not ask the wrong questions. The rule was that those who wanted what we had to offer came unsolicited; they knew where to find us. They trusted our rigor and saw our equipment. The Empirica âIgorâ protocol which consists in âsystematically buying volatilityâ was getting boringly prosperous, especially after the post-Sep11 dry spell in volatility, which goes against what one would have expected. Most volatility buyers went progressively out of business; many investors came to us. I enjoyed reading burst of Schadenfreude on the web every time volatility went down, with speculations about our fate âwe identified some of the sources, almost always minor quants and semi-academics who felt insulted by our skepticism. After befriending Danny Kahneman in 2002, and inspired by the difference between ârentâ (i.e., expense) and âlossâ and such distortions in mental accounting, we transformed the outside capital management of Empirica into a âhedgingâ firm (except for my own portfolio and that of a large investor). People pay generously for insurance but get angry when they have a loss. An expense does not bother people as much as a loss, particularly when they see the reason for the expense. This, surprisingly, caused clients to increase the committed capital after âbleedâ, because of the volatility adjustment effect. Volatility drops after these spells, increasing the incentive to hedge. After periods of low volatility, more people wanted to hedge their portfolios as the costs of insurance got lower. We also offered different portfolios to different clients, for a total of a dozen menus. We had a client with a large investment set aside for âwhen the VIX drops below 11â. Such business of âbuying volatilityâ is not what I stand for as much as âtailâ buying âimplying that large deviations are the ones that are underestimated. But the two are weakly correlated[3]. A business that corresponds to my ideology is the âalphaâ protocol in which I sold ATM options against the wings; this one did well in the drop of volatility but we could not offer it to investors because its worst case scenario was in a 10% drop in the SP500, exactly where most expected the profits to offset their portfolio losses. Selling insurance I have to say was not free work: we had to work very hard at maintaining the target properties, often worrying about the replacement of options âconsider the obligation and responsibility: we HAD to produce profits in the event of a catastrophe. My greatest headaches were mistakes and out-trades.
SEE NEXT POST
NNTâs Sabbatical from Empirica
People keep asking me why I am taking a sabbatical. Facts: I returned between 300M and 400M to investors under the official reason of âwanting to take a sabbaticalâ (in fact we turned down cumulatively an equivalent sum over the past two years as Empirica rarely took funds under the protocol). âSabbaticalâ has the Semitic root Shin-Bet-Aleph, possibly the same origin as âsevenâ âmy last sabbatical ended exactly six years ago; is there a magic number?. Project: âto do pure thinkingâ for close to a year; completely stripped of any active business obligations to investors, free to trade Empiricaâs portfolio in what manner I wish and not trade for as long as I feel[1].
There is something beyond the mere self-granting of a sabbatical. I found it exhilarating to return the funds to their owners for no particular reason, nothing other than this feeling of control (few people have the guts to tear themselves away from something, they wait for events to control their choices). As a Stoic I should accept that the feeling of being in control of oneâs environment (making the random internally more deterministic) does not require such action ( a true Stoic would find it repelling to earn money beyond oneâs own subsistence but thatâs another discussion); but, as a human being endowed with a hormonal system, I feel elation at exercising my own choices. Walking away from money (albeit temporarily) is far more elevating, and, even in the narrowly hedonic sense, it is far preferable to striving for it âjust like inverse greed. Saying âenough for meâ gives a different feeling than being told âenough for youâ. Someone explained to me that turning down âsuch free moneyâ is like throwing money in the garbage can, which might be right for a neoclassical economist, but not for someone who knows something about human nature. Kahneman and Tversky studied the âloss aversionâ ingrained in humans: a loss is not (both qualitatively and quantitatively) the same as a negative profit, an error by commission is not the same as an error by omission (preventing deaths is not the same as saving lives); to that I have to add that money turned down is not the same as money given away. This is the topic of the third volume of the uncertainty trilogy, which I find more fun to write than The Black Swan [2] (mostly because of the return of Nero Tulip). The subject is about Stoicism, and the inseparability of utility and probability (i.e., chance and happiness are too intertwined). This merges the philosophies of randomness with the new topics of economics of happiness and neuroeconomics (title: Chance and the Logic of Happiness --my focus in on a nonhedonic, even antihedonic theory of happiness).
A few details about Empirica âtime for revelations. Reading external descriptions of our activities was a great source of amusement at Empirica, particularly when people made assertions with great confidence while having no notion of what our business was about, how much we had under management, and what we did with it. This went on for close to 6 years. Clearly, the author of Fooled by Randomness is not going to be stupid enough to play the âhedge fundâ game âcompeting with spurious survivors, or having your track records examined by Sharpe ratio slow-thinkers who do not realize that the world is not Gaussian. Our tactic was to initially turn down investors with the polite âthis is not for youâ. We only accepted those investors who, aware of fat tails, insisted on Black Swans protection under our rigid protocols and were committed to not ask the wrong questions. The rule was that those who wanted what we had to offer came unsolicited; they knew where to find us. They trusted our rigor and saw our equipment. The Empirica âIgorâ protocol which consists in âsystematically buying volatilityâ was getting boringly prosperous, especially after the post-Sep11 dry spell in volatility, which goes against what one would have expected. Most volatility buyers went progressively out of business; many investors came to us. I enjoyed reading burst of Schadenfreude on the web every time volatility went down, with speculations about our fate âwe identified some of the sources, almost always minor quants and semi-academics who felt insulted by our skepticism. After befriending Danny Kahneman in 2002, and inspired by the difference between ârentâ (i.e., expense) and âlossâ and such distortions in mental accounting, we transformed the outside capital management of Empirica into a âhedgingâ firm (except for my own portfolio and that of a large investor). People pay generously for insurance but get angry when they have a loss. An expense does not bother people as much as a loss, particularly when they see the reason for the expense. This, surprisingly, caused clients to increase the committed capital after âbleedâ, because of the volatility adjustment effect. Volatility drops after these spells, increasing the incentive to hedge. After periods of low volatility, more people wanted to hedge their portfolios as the costs of insurance got lower. We also offered different portfolios to different clients, for a total of a dozen menus. We had a client with a large investment set aside for âwhen the VIX drops below 11â. Such business of âbuying volatilityâ is not what I stand for as much as âtailâ buying âimplying that large deviations are the ones that are underestimated. But the two are weakly correlated[3]. A business that corresponds to my ideology is the âalphaâ protocol in which I sold ATM options against the wings; this one did well in the drop of volatility but we could not offer it to investors because its worst case scenario was in a 10% drop in the SP500, exactly where most expected the profits to offset their portfolio losses. Selling insurance I have to say was not free work: we had to work very hard at maintaining the target properties, often worrying about the replacement of options âconsider the obligation and responsibility: we HAD to produce profits in the event of a catastrophe. My greatest headaches were mistakes and out-trades.
SEE NEXT POST
Taleb continued:
I can reply here to questions such as: âis volatility always cheap?â It is quite silly to think that my theory of humansâ scorn of the abstract (the subject of the Black Swan), our tendency to underestimate the odds of large unspecified deviations is not compatible with our overestimating some catastrophic events, those that are in the press or vivid enough to fool our mental probabilistic map. After all, people buy lottery tickets as their cognitive system gets overwhelmed with the image of the payoff. And there is the potency of vivid causal links. If you ask traders to mentally price 1) an option that pays you âif the stock market drops by 10% any day over the next calendar yearâ or 2) another one that pays âif the stock market drops by 10% any day over the next calendar year owing to a terrorist attackâ, the latter is likely to priced higher. Mistaking the superset for the subset is a common human error; and getting to be increasingly common under the structure of information offered to us. Buying volatility âbecause of event Xâ coming up, such as a UN vote or a scheduled crucial meeting is extremely foolish. There is no such thing as profitable scheduled volatility âwe figured out that the conditional probability of a large move does not depend on implied volatility, meaning that you did better buying options when there is absolutely no reason to do so than when you saw a rationale to do so, since other traders would also be likely to identify it (there is a small adverse selection with mergers and acquisitions that made jumps more likely after an unexplained rise in implied volatility). I am more likely to profit from owning options when people complain about the âbleedâ (the option premium erosion), not when they say âthese times are volatileâ. In addition there is a mental bias that consists in not believing that âupsideâ moves mean volatility. Volatility is blind to the sign of the move ânot humans, implying that âupsideâ options can be quite interesting.
What am I going to do during my sabbatical? The entire idea is to have no plan, no obligations: none in publishing, teaching, reading, or trading; it is exhilarating to be free and not account to anyone. You wake up without a set schedule and improvise. Even having a set book to read robs the activity of the pleasure. We underestimate the value of pure freedom. I have a small number of scheduled talks and lectures, but I never prepared for these and look forward to the chemistry with these audiences. I am writing The Black Swan without a deadline, and I am meeting people to discuss the activity for when I return to Empirica. Best, NNT
--------------------------------------------------------------------------------
[1] I received tons of emails from well-wishing readers asking me if there is a second visit by the old insidious âBlack Swanâ. The answer is (as of last November) no.
[2] Fooled by Randomness is the first volume, The Black Swan the second, & Chance and the Logic of Happiness the third.
[3] By saying âweakly correlatedâ I know I may be saying something lacking in rigor. âVolatilityâ is necessarily a Gaussian concept; we do not even know how to measure it âthe weights are Norm L2 (meaning that observations are weighed by themselves, so large observations weigh more than smaller ones). In a power law environment, with exponent a<2 (or a Multifractal process with about any a), volatility is undefined but the fatness of tails can be known, measured by a and some degree of asymmetry. Hopefully in the victory of Mandelbrot paradigm we will not talk about such thing as volatility but tail exponent.
In plain language this means that under a regime where much is explained by few impacting observations (âBlack Swansâ), the notion of measurement by âvariabilityâ is faulty. In brief there is a qualitative (not just quantitative) difference between a nonGaussian and a Gaussian world, which makes such concepts not transferable.
Quote from hank rollins:
Taleb continued:
I can reply here to questions such as: âis volatility always cheap?â It is quite silly to think that my theory of humansâ scorn of the abstract (the subject of the Black Swan), our tendency to underestimate the odds of large unspecified deviations is not compatible with our overestimating some catastrophic events, those that are in the press or vivid enough to fool our mental probabilistic map. After all, people buy lottery tickets as their cognitive system gets overwhelmed with the image of the payoff. And there is the potency of vivid causal links. If you ask traders to mentally price 1) an option that pays you âif the stock market drops by 10% any day over the next calendar yearâ or 2) another one that pays âif the stock market drops by 10% any day over the next calendar year owing to a terrorist attackâ, the latter is likely to priced higher. Mistaking the superset for the subset is a common human error; and getting to be increasingly common under the structure of information offered to us. Buying volatility âbecause of event Xâ coming up, such as a UN vote or a scheduled crucial meeting is extremely foolish. There is no such thing as profitable scheduled volatility âwe figured out that the conditional probability of a large move does not depend on implied volatility, meaning that you did better buying options when there is absolutely no reason to do so than when you saw a rationale to do so, since other traders would also be likely to identify it (there is a small adverse selection with mergers and acquisitions that made jumps more likely after an unexplained rise in implied volatility). I am more likely to profit from owning options when people complain about the âbleedâ (the option premium erosion), not when they say âthese times are volatileâ. In addition there is a mental bias that consists in not believing that âupsideâ moves mean volatility. Volatility is blind to the sign of the move ânot humans, implying that âupsideâ options can be quite interesting.
What am I going to do during my sabbatical? The entire idea is to have no plan, no obligations: none in publishing, teaching, reading, or trading; it is exhilarating to be free and not account to anyone. You wake up without a set schedule and improvise. Even having a set book to read robs the activity of the pleasure. We underestimate the value of pure freedom. I have a small number of scheduled talks and lectures, but I never prepared for these and look forward to the chemistry with these audiences. I am writing The Black Swan without a deadline, and I am meeting people to discuss the activity for when I return to Empirica. Best, NNT
--------------------------------------------------------------------------------
[1] I received tons of emails from well-wishing readers asking me if there is a second visit by the old insidious âBlack Swanâ. The answer is (as of last November) no.
[2] Fooled by Randomness is the first volume, The Black Swan the second, & Chance and the Logic of Happiness the third.
[3] By saying âweakly correlatedâ I know I may be saying something lacking in rigor. âVolatilityâ is necessarily a Gaussian concept; we do not even know how to measure it âthe weights are Norm L2 (meaning that observations are weighed by themselves, so large observations weigh more than smaller ones). In a power law environment, with exponent a<2 (or a Multifractal process with about any a), volatility is undefined but the fatness of tails can be known, measured by a and some degree of asymmetry. Hopefully in the victory of Mandelbrot paradigm we will not talk about such thing as volatility but tail exponent.
In plain language this means that under a regime where much is explained by few impacting observations (âBlack Swansâ), the notion of measurement by âvariabilityâ is faulty. In brief there is a qualitative (not just quantitative) difference between a nonGaussian and a Gaussian world, which makes such concepts not transferable.
His writing is as prolix and pretentious as a lawyer's. I know the guy is smart, so why does he have to come off like some pseudo-intellectual? Is it an affectation? Or are the quants who love him and buy his books oblivious to the need for clarity and simplicity when discussing complex subjects in the English language. By the way, I'd still like to see his audited 10-year returns.
Hanksurfer,
It's kinda hard to tell from the above posts (talk about obfuscation, sheesh...), so did Taleb lose money in his funds?
If he mostly bought way out-of-the-money index options, then I'd say he did lose money. And Vic N mentioned that he was "glad to sell all those OTM ops to Taleb" or something like that.
Any info you can share?
Thnks
C
It's kinda hard to tell from the above posts (talk about obfuscation, sheesh...), so did Taleb lose money in his funds?
If he mostly bought way out-of-the-money index options, then I'd say he did lose money. And Vic N mentioned that he was "glad to sell all those OTM ops to Taleb" or something like that.
Any info you can share?
Thnks
C
Quote from nravo:
By VN you must mean Neiderhoffer -- another quant who writes as badly as he trades. Is this guy still around?
He runs a quazi political discussion once a month in NYC. It has to do with Libertarianism. I'm not sure if he still trades actively, but I guess you could ask him yourself.
-Neo