Wait! Before You Invest in Nassim Taleb's New Fund

G

Greg Richards

WAIT! BEFORE YOU INVEST IN NASSIM TALEB’S NEW FUND
Joe Wiesenthal – BUSINESS INSIDER – June 3, 2009
http://www.businessinsider.com/wait-before-you-invest-in-nassim-talebs-new-fund-2009-6

Universa Investments, the Nassim Taleb-affiliated fund group, is opening a new fund where they'll bet on inflation. Sounds good. Lots of smart people think inflation is on the way, and just as many people want to protect against it.

But before you do, make sure you have a reasonable idea of how much he's made clients in his last fund. There's a nasty mis-fact flying around in a recent GQ article, which claims he made his clients $20 billion.

Here's Taleb's exact quote in the article:

“I went for the jugular—we went for the max. I was interested in screwing these people—I’m not interested in money, but I wanted to teach them a lesson, and the only way you can do it is by trying to take it away from them. We didn’t short the banks—there’s not much to be gained there, these were all these complex instruments, options and so forth. We’d been building our positions for a while…when they went to the wall we made $20 bln for our clients, half a billion for the Black Swan"

Amazing returns, and great quote! Except, not really.

Janet Tavakoli of Tavakoli Structured Finance was suspicious and confirmed that it was inaccurate:

I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: “The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.” This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ’s article. The total gains could be a tiny fraction of what Taleb loosely describes as “face value.” 2

Why is GQ’s mistake important? In my opinion, public claims of enormous private hedge fund gains require credible back up, and one would think that GQ would have known that before it inaccurately quoted Taleb as having made a bell ringing gain of $20 billion for clients.

Presumably, the error referred to outside clients, not the black swan fund itself, but it could have the side effect of attracting investors to the black swan fund, similar to advertising or salesmanship.

The whole letter she sent out is below, but we'll say that if anything Tavakoli is being charitable. It certainly doesn't sound like "we made $20 billion for our clients..." could possibly mean the same thing as the 20 billion corresponding to the face value of the positions. So much for Taleb's supposed humility.:


TALEB KILLS $20 BILLION MYTHICAL SWAN
http://www.tavakolistructuredfinance.com/Mythical Swan.pdf
TSF – June 1, 2009
By Janet Tavakoli

A recent GQ article quoted Nassim Nicholas Taleb as saying that in the falling market he “made $20 billion for our clients, half a billion for the Black Swan fund.” 1

I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: “The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.” This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ’s article. The total gains could be a tiny fraction of what Taleb loosely describes as “face value.” 2

Why is GQ’s mistake important? In my opinion, public claims of enormous private hedge fund gains require credible back up, and one would think that GQ would have known that before it inaccurately quoted Taleb as having made a bell ringing gain of $20 billion for clients. Presumably, the error referred to outside clients, not the black swan fund itself, but it could have the side effect of attracting investors to the black swan fund, similar to advertising or salesmanship.

The black swan fund’s strategy is purportedly to buy out-of-the-money put options on stocks and broad market indices and hedge tail risk for clients. The strategy may produce long periods of mediocre—or even negative—returns followed by a large gain and vice versa. No one can tell you for certain exactly when (or for how long) large gains are possible. Initial success in a newly created fund may not be replicated in the future, and there is always the problem of scaling. Scaling refers to the fact that an individual fund may make a high return on an initial investment, say 100% on $100 million, but lose 10% on $1 billion.

THE MARKET CAN STAY IRRANTIONAL LONGER THAN YOU CAN STAY SOLVENT (or PATIENT)
We know that big unanticipated market moves always result in big winners and big losers. After the fact, many winners claim they were smart—not just lucky.

In my opinion, any claim of enormous gains for any strategy—including a black swan fund—should be explained and balanced with caveats. The siren song of enormous gains is always enticing, but the actual swan song may be off key.

A black swan fund strategy may produce future huge gains, but it may also produce mediocre returns (or even slowly burn cash for long periods) before producing another huge gain. The waiting period for the next big payday could be brief, or it could be longer than your investment horizon.

(Update See also: “Taleb’s Stranded Swan?” – TSF Commentary June 3, 2009) http://www.tavakolistructuredfinance.com/Stranded Swan June 3 2009.pdf


1 “I went for the jugular—we went for the max. I was interested in screwing these people—I’m not interested in money, but I wanted to teach them a lesson, and the only way you can do it is by trying to take it away from them. We didn’t short the banks—there’s not much to be gained there, these were all these complex instruments, options and so forth. We’d been building our positions for a while…when they went to the wall we made $20 bln for our clients, half a billion for the Black Swan fund.” (First page, second column, 7th full paragraph of “The Thinker,” GQ UK edition, May 2009)


2 Taleb’s web site home page showed this article as one of two “most representative overall profiles.” After my query, Taleb added a qualifier next to the link to the article: “(with typo on the ‘billions’).”


Hat tip to alert readers and Chicago’s option market makers. Thanks also to Nassim Taleb for confirming the inaccuracy of the quote. Will Self, the author of the GQ article, did not respond to an email sent to his agency.
 
Hey, I just made $20B on my mutual fund swing trade.*













* by "made" I mean I looked at the number 20B on my calculator while placing my market sell. My trade profit was about $4k
 
GQ is not a finance magazine. obviously, hyperbole is their stock in trade. They sell fashion ads, they have no "duty of care" as the above author appears to assume. no need to be jealous here, perhaps Taleb was misquoted, big deal.

surf
 
WHY NASSIM TALEB COULDN’T CLEAN UP AFTER 9/11
http://www.businessinsider.com/why-didnt-nassim-taleb-make-money-after-911-2009-6
by Joe Weisenthal
BUSINESS INSIDER Jun. 3, 2009, 8:39 AM

Janet Tavakoli, fresh off of debunking an erroneous Nassim Taleb stat in a GQ article, is back with another critical piece, this time asking a very interesting question: Why didn't Taleb make any money with his old fund, Empirica Kurtosis, after 9/11, which he's described as a mother of all "black swans." According to Tavakoli, Empirca Kurtosis wound down in 2004-2005, though Taleb has been silent on this.

Tavakoli's theory -- which she doesn't prove -- is that the fund didn't have total control over client money, a structure completely ill-suited to a vehicle intended to make money off of rare events.

“Imagine a scenario: When the black swan appears, investors panic. The fund manager wants to cash in gains when volatility soars. Nervous investors want the manager to buy more “insurance,” when it is expensive and ill-considered. But investors should not be blamed for a black swan fund’s anemic performance any more than a pilot would blame nervous passengers for a bumpy plane ride. Management takes credit (and juicy fees) for the gains, so it should take responsibility for overall performance. This scenario may not be relevant for Empirica Kurtosis, but then, what is the explanation?”

As for the wind-down itself, she says:

“Taleb’s web site stated EMPIRICA WAS NEVER CLOSED [emphasis in original].2 That may be true if one is only referring to Empirica LLC, a risk management operation. But in my opinion, it is incomplete to assert this without mentioning the voluntary wind-up of Empirica Kurtosis Limited.”

“Taleb never responded to my query about the wind-up. The Bermuda-based trustee was more helpful and confirmed that Empirica Kurtosis Limited was indeed wound up in 2004/2005.”

Fine, maybe Taleb's just an ideas guy and doesn't want to talk about returns, or he thinks that things like "money" and details are just a distraction. But he obviously is willing to attach his brand to funds, while slamming others when they lose money, so we think it's all fair game.
Tavakoli's full piece is embedded here.

TALEB’S STRANDED SWAN?
http://www.tavakolistructuredfinance.com/Stranded Swan June 3 2009.pdf
TSF Commentary – June 3, 2009
By Janet Tavakoli

Before penning my previous commentary, I contacted Nassim Nicholas Taleb to check whether there were any inaccuracies in a Wall Street Journal article about the performance of his previous black swan fund, Empirica Kurtosis Ltd. The article said the fund had a 60% return in 2000 followed by "losses in 2001 and in 2002.” In 2003 and 2004 it had low single-digit gains, a period when hedge funds posted average returns of 20% and 9% respectively. The fund’s size was around $375 million when most of the assets were returned to investors.

In my query to Taleb, I also asked for confirmation that the fund experienced a voluntary wind-up…more on that later.

Taleb did not respond. Considered with his previous coy reply regarding GQ’s mythical $20 billion, I gave up hope of clarification. I enjoy debating philosophy, but debate is no substitute for size of actual gains.

I was particularly interested in Empirica Kurtosis’s reported anemic performance in 2001, because according to Taleb, the 9/11 terrorist attacks of 2001 were a “black swan” event.1

How can a black swan fund do so poorly when the black swan finally appears?

Imagine a scenario: When the black swan appears, investors panic. The fund manager wants to cash in gains when volatility soars. Nervous investors want the manager to buy more “insurance,” when it is expensive and ill-considered. But investors should not be blamed for a black swan fund’s anemic performance any more than a pilot would blame nervous passengers for a bumpy plane ride. Management takes credit (and juicy fees) for the gains, so it should take responsibility for overall performance. This scenario may not be relevant for Empirica Kurtosis, but then, what is the explanation?

What about the voluntary wind-up I mentioned earlier?

Taleb’s web site stated EMPIRICA WAS NEVER CLOSED [emphasis in original].2 That may be true if one is only referring to Empirica LLC, a risk management operation. But in my opinion, it is incomplete to assert this without mentioning the voluntary wind-up of Empirica Kurtosis Limited.

Taleb never responded to my query about the wind-up. The Bermuda-based trustee was more helpful and confirmed that Empirica Kurtosis Limited was indeed wound up in 2004/2005.

Winners’ Swan Dive
Big wins and big losses always occur after any market move. Winners are eager to claim they were smart—not lucky.

The big picture should be big enough to provide perspective. A black swan fund may have a good year followed by losses and mediocre returns. Empirica Kurtosis Limited may have become an example of a black swan fund with clipped wings.

(See also: “Taleb Kills $20 Billion Mythical Swan,” June 1, 2009) http://www.tavakolistructuredfinance.com/Mythical Swan.pdf


1 Excerpted Transcript May 8, 2007 – The Colbert Report (Stephen Colbert interviews Taleb)

Taleb: Take Google, September 9/11, the rise of the internet, Harry Potter…They were unexpected and no one saw them coming, and after they happened, oh yah, it was so explainable by historians, scholars and academics, but before they happened, they were so unexpected.

[Later]

Colbert: So you say…9/11 could not be predicted.

Taleb: It is very very hard to predict these events.

[Apparently Taleb never heard of the August 2001 presidential briefing: “Bin Laden Determined To Strike in U.S. based on a July 2001 intelligence report.]

Colbert: …I’m glad to hear that, because that means the 9/11 Commission was a waste of time. Because we shouldn’t have investigated why it happened, right?

Taleb: You need you need [sic] to investigate to see if it is predictable or not…

Colbert: But why? Why investigate something that can’t be predicted, because there is nothing to learn from it.

Taleb: No, after the fact, Okay, you have to look at…uh…first of all you can learn something from the event, it’s not like you can’t learn at all.

Colbert: Okay

Taleb: But 9/11, 9/11, what I’m saying is that its there is so many events like 9/11 that could have taken place, you see, so, its just to see if there’s responsibility, is there any vigilance or no vigilance. This is why we investigated 9/11.

Colbert: ..Is Iraq a Black Swan? We couldn’t have ever foreseen it would go poorly, we would never have known that was not going to go well…

Taleb: No, wars, wars, yah, listen, wars since Napoleon…we learned that wars…wars are more and more unpredictable, more and more complex, the link between action and consequence becoming fuzzier, and I think that the war in Iraq was a mistake…we should have seen that it could have led to these dire consequences. [Only since Napoleon?]

Colbert: We should have but we didn’t, therefore we couldn’t.

[Later]

Colbert: It seems like you’re essentially saying the future is unpredictable.

Taleb: No, I’m saying, yes, my idea in the book is to show two things: number one that the future is rather unpredictable, it is dominated by Black Swans and these black swans are not predictable, and the second point that is quite central, is that we humans…all right?...try to concoct stories to convince ourselves that the future is more predictable than it actually is…[Like Taleb’s Napoleon story?]

Colbert: The future is essentially not predictable.

Taleb: Yes, it’s not.

Colbert: By that logic, doesn’t it mean that in the future you will be able to predict things, because you are predicting that you cannot predict things?

2 The only mention of Empirica on Taleb’s web site was as follows: “Owned Empirica LLC a trading/hedging/protection operation (currently the business became the Black Swan Protection Protocol managed by the traders at Universa –I am an advisor). Note that EMPIRICA WAS NEVER CLOSED. Current Corporate Boards: a few hedge funds. A prophetic novel by Viken Berberian about Empiricus Kapital.” There was no mention of Empirica Kurtosis Limited (Emprica Kurtosis), a fund, or of its returns even though it seems it may have been part of this operation at one time. The fund’s returns are not mentioned in Taleb’s Wikipedia profile (as of this writing). The returns for Empirica Kurtosis Limited are mentioned in Mark Spitznagel’s Wikipedia profile, but in an incomplete way. Spitznagel was a partner with Taleb in this venture: “Empirica was reported to have made a 60% return in 2000 and lower (though unconfirmed) returns from 2001 to 2004.”
 
who would brag about making money during 9/11 specially when he is from lebanon. Some people just shouldn't be allowed near a publisher, cause they are way too dumb!!!
 
Quote from Greg Richards:

Wall Street Journal article said the fund had a 60% return in 2000 followed by "losses in 2001 and in 2002.” In 2003 and 2004 it had low single-digit gains, a period when hedge funds posted average returns of 20% and 9% respectively. The fund’s size was around $375 million when most of the assets were returned to investors.

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Stranded swan sounds right for these returns:

2000: 58.88%

2001: -8.39% (according to Bloomberg, this is the year money “flocked” to the fund so most of the investors may have ended up net negative if Bloomberg is accurate);

2002: -13.38%
 
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