Taleb vs Assness on tail hedging and risk parity

[MrMuppet]

Well yeah, I probably must disagree with someone who disagrees with the notion that tail risk is underpriced and the disagrees with the explanation given by responding with "that ain't so because you don't look at the big picture".

By the way, Universa is exactly covering what it promises to cover. Speciality insurance if you like. In that they come closer to fulfilling their fiduciary duty than many other funds, to deliver what they promise, not in terms of return numbers.

The big picture: Tail risk is sold by funds to post steady performance to attract AUM. Funds make a decent living from 2/20 because they risk customer money and not their own. When (I'm not saying if) they eventually blow up, fund manager has already bought his house in the Hamptons.

This provides a much bigger incentive than pricing tail risk "correctly" in a academic way. It has been done and will be done for years to come. Short vol and short tail is the biggest trade there is at the moment.

On a side note, when you know that you're exposed to tail risk and you know that tail risk insurance is oh so cheap...why would you pay 2/20 to a fund to buy it for you??

 

[faltd]

re your last question, I believe the reason might be, as other posters suggested already, that Universa does not just put on static positions month in, month out, but that the process to minimize cost is a little more complex than you or I want to believe. That might be worth paying a premium for. I have not looked into any specifics re Universa hence don't know what exact premium it is worth. But I am very certain that their investment approach is more complex than you believe.

The big picture: Tail risk is sold by funds to post steady performance to attract AUM. Funds make a decent living from 2/20 because they risk customer money and not their own. When (I'm not saying if) they eventually blow up, fund manager has already bought his house in the Hamptons.

This provides a much bigger incentive than pricing tail risk "correctly" in a academic way. It has been done and will be done for years to come. Short vol and short tail is the biggest trade there is at the moment.

On a side note, when you know that you're exposed to tail risk and you know that tail risk insurance is oh so cheap...why would you pay 2/20 to a fund to buy it for you??

 

[Logicae]

I think options markets will come to the realization (yet again) that they still underprice tail risk and the frequency thereof. Taleb's approach may not sit right with many of the quick and easy gun slingers on Wallstreet and beyond but he has a sound approach and I don't know a lot of guys who have a keener understanding of options pricing and risk management than Taleb.

Not only that, he explains everything yet people still misunderstand. The Black Sholes method biggest issue is it cannot price options correctly, it's grossly inefficient. That's why he argues you should always be a buyer of options and not a seller. How can you put a price on something that hasn't occurred, might not occur, and or you don't know is possible to occur? His first fortune was made in a oil trade. He saw where the market was going and took advantage of it...by buying straight negative deltas. He had to wait a few years but he spread out his bets and he made A LOT more than 10X. And he did that again with the mortgage crisis.

 

[MrMuppet]

Not only that, he explains everything yet people still misunderstand.

No, people don't misunderstand.
People want to make money on a consistent basis. They run businesses, they need to pay rent and salaries and their mortages.

Name a business that's like " Well, I have no idea when sales is coming and I don't know how much it's gonna be, but I somehow calculated that everybody will need my product at a certain moment"

So on the basis of an academic calculus masturbation Taleb is 100% correct. Tail risk is underpriced. But in real life, selling premium and tail risk is much more +EV.

Would you rather:
1. Collect 100M, lose 5% to the market and 5% on AUM each year for...let's say 8 years and make 1000% in year 9?

2. Collect 100M, make 5% from the market and gain 30% AUM each year for 8 years and lose 40% in year 9?

Your fee model is classic 2/20

1. is making you 82m in fees and you end up with a 360M fund
2. is making you 100m in fees and you end up with a 530M fund

1. is very likely to make you a lot less in fees since you don't know when the big bang will come or if one of your big investor shows you the finger and withdraws.
2. is very likely to be stable income and if you're lucky and not invested during the big bang, you'll make much more

1. relies on you being famous so that anyone even believes your gibberish and gives you money
2. relies on snake oil sales techniques, bloatwords like "quantitative models" and a nice brochure. Word of mouth and the FOMO of your investors friends will do the rest.

What is more likely to draw in funds from average joe family offices?


So I hope you do your nickname justice. Taleb is the high level evidence that there's a difference between being right and making money. People are not stupid, they understand Talebs arguments. But then they look at the results and their wallets and keep selling tail risk.

You even could say that tail risk is still overpriced as long as institutions are making more money by selling it.

 

[Real Money]

MrMuppets right, Taleb's only good at math and that's why he should stay in the back office.

"Beware of geeks bearing formulas."

-Warren Buffet

​

Taleb knows fuckloads about what statisticians call "asymptotics" and all the other Ph.D shit.

So this quote is 100% accurate.

Taleb is all about academic masturbation and while there are fund managers that only know 1% of what he knows, they are 100x more successful than him because they understand the game.

The problem is that the fund can 'blow up' just by client redemptions killing the aum.

If you look at the big short story, the clients panicked when Burry bought all those CDS (long tail risk).

"During his payments towards the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct; he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3% including dividends over the same period."

https://en.wikipedia.org/wiki/Michael_Burry

It's like a lottery because there's no telling if or when it will pay off. It's not a client friendly strategy. The real big boys (actual hedge fund investors) want to brag about how much they're making. It's all about competition when you're that rich. The last thing they care about is some quant model.

LOL

 

[MrMuppet]

It's like a lottery because there's no telling if or when it will pay off. It's not a client friendly strategy. The real big boys (actual hedge fund investors) want to brag about how much they're making. It's all about competition when you're that rich. The last thing they care about is some quant model.

LOL

this guy knows the game

 

[ironchef]

MrMuppets right, Taleb's only good at math and that's why he should stay in the back office.

"Beware of geeks bearing formulas."

-Warren Buffet

​

Taleb knows fuckloads about what statisticians call "asymptotics" and all the other Ph.D shit.

So this quote is 100% accurate.

The problem is that the fund can 'blow up' just by client redemptions killing the aum.

If you look at the big short story, the clients panicked when Burry bought all those CDS (long tail risk).

"During his payments towards the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct; he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3% including dividends over the same period."

https://en.wikipedia.org/wiki/Michael_Burry

It's like a lottery because there's no telling if or when it will pay off. It's not a client friendly strategy. The real big boys (actual hedge fund investors) want to brag about how much they're making. It's all about competition when you're that rich. The last thing they care about is some quant model.

LOL

this guy knows the game

Are you both professionals, Institutional traders or running your own hedge funds?

To me his logic sounded right but I carry no weight I am just a mom and pop amateur retail.

 

[Real Money]

Are you both professionals, Institutional traders or running your own hedge funds?
To me his logic sounded right but I carry no weight I am just a mom and pop amateur retail.

Look, I'm no expert on Taleb. He has a "barbell" strategy and he always talks about how tail risk is cheap. I don't even care about the barbell thing (it's boring, whatever).

I just know that going long tail risk and managing a hedge fund aren't really things that go together. Not for fund managers, and not for the clients.

It's like buying deep OTM puts, losing money, buying more, and waiting (praying) for vol to blow out -- for years on end.

I have a degree in math, but I lost interest when it came time to actually become an academic. Maybe that's why I have a disdain for academics who think they are hot shit.

Taleb is pretty much the poster boy for that.

All the best mathematicians died a long time ago.

He knows a lot about probability, and if I was into trading vol I'd probably care and know a lot more about him and his opinions. His books were boring and he was slow to get to the point, so I never read more than half of Fooled by Randomness. I may actually read his books someday.

So, I know a lot about probability, and a lot about markets, trading, and shit like that. I've been studying and reading about that stuff since like 2007.

 

[Sig]

Not only that, he explains everything yet people still misunderstand. The Black Sholes method biggest issue is it cannot price options correctly, it's grossly inefficient. That's why he argues you should always be a buyer of options and not a seller. How can you put a price on something that hasn't occurred, might not occur, and or you don't know is possible to occur? His first fortune was made in a oil trade. He saw where the market was going and took advantage of it...by buying straight negative deltas. He had to wait a few years but he spread out his bets and he made A LOT more than 10X. And he did that again with the mortgage crisis.

BS is "inefficient"? What does that even mean? It takes too long for you to run the formula? There's a faster formula that does the same thing? It takes part of the option value in exchange for being calculated?

I think perhaps the word "efficient" doesn't mean what you think it means.

 

[guowei58]

Assness is right on tail hedge.

Taleb's theory is useless. plus he is a complete ass. saw him on a flight once acting like a spoiled brat...people who are mean to the service staff are the worst, even worse than taking a stupid and useless topic and writing 20 incomprehensible books about it.