Try This Hedge Fund Strategy On For Size
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Unlike most investors in October, Nassim Nicholas Taleb, author of best-selling book, "The Black Swan," had an incredible October. While it seemed like the stock market plunged last month, Taleb's hedge fund soared to new heights.
The Black Swan is a book about the impact of extreme events on the world and the financial markets. Taleb helped launch a hedge fund, Universa Investments L.P., which is loosely based many of the book's themes, including how to achieve large returns despite a sharp market downturn.
The Wall Street Journal reported funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October. The funds are also managed by Mark Spitznagel, who previously as a pit trader on the CBOT.
Mr. Taleb told the WSJ that investors often ignore the risk of extreme moves in the market. The name of the book, "Black Swan," alludes to the belief, that all swans are white -- a notion that was proven wrong when explorers discovered rare, black swans. Therefore, a black-swan event is something that is highly unexpected.
This is how Universa's strategy works: It buys far-out-of-the-money "put" options on stocks and stock indexes. These are bets that the market will see a sharp, sudden downturn and because these put options are so out of the money, they are extremely cheap. However, they can become extremely valuable in a market decline of 20% or more in a one-month period.
Here's an example of one of Universa's trades it executed. At the end of September, when the S&P 500 was trading around 1200, Universa bought put options that would pay off if the index fell to 850 by late October. Since such a descent was considered highly improbable, such options only cost 90 cents. However, on Oct 10, those options cost $60 as the S&P 500 plunged. Universa sold most of its position in the high-$50 range.
Universal also employs this strategy with individual equities as well. For example, the fund purchased a puts on Goldman Sachs Group (NYSE: GS) in July. The fund also bought puts on American International Group (NYSE: AIG), paying $1.29 apiece for the contracts. The puts were priced to pay off if AIG dipped below $25 a share by September. Universa eventually sold them for about $21 apiece. Nice return!
This strategy can have many years of lackluster returns as dramatic downturns in the financial markets have historically been rare events. "We're discovering the fragility of the financial system," Mr. Taleb told the WSJ, and he expects market volatility to continue as more hedge funds run into trouble.
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Black Swain Fund
Hey, ever thought about given the symbol of the black swan fund? I don't know-just a thought.
Land Developers and Black Swans
Land Developers and Sustainable Economics October 2008 http://www.sldi.org/newService/SLDIOct2008.html As previously forecast in this column, a series of financial “Black Swans” is now upon us. These major disruptive events, which by definition were unpredicted by the establishment experts, now include the failures of Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Wachovia, and Washington Mutual, with more surprises undoubtedly on the way. While there have been numerous authorities working day and night to solve the problem, it is important to note that these same people were the ones that were managing the financial system in the first place. According to Professor Nouriel Roubini, no professional independent economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury Department's rescue plan. This brings to mind some words of wisdom from Albert Einstein - “We can't solve problems by using the same kind of thinking we used when we created them”. As pointed out in the recently published book, Bad Money – Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, the failure of the current financial system was not only predictable, but this same kind of thinking was also responsible for the fall of the last two global economic powers – the Netherlands followed by Britain. As is established in the book and elsewhere, the current credit crisis interrelates with our energy crisis and all the other economic failures the global economy is now suffering through. It all comes down to deficit spending by both public and private entities. Ironically, the current financial meltdown is confirmation of a prediction made in 1995 when, as a land developer and the past-president of the Florida Native Plant Society, I authored an article entitled “Earth Restoration – The Bridge to a New Global Culture“, wherein I said, “The existing world order is teetering on the brink of bankruptcy and will not be capable of sustaining itself much longer by exploiting dwindling world supplies of natural resources and by deficit government spending…The good news is that out of these huge problems will come the pressure to replace our old system with new political and business structures that will provide for a sustainable global economy”. How do we make our civilization more sustainable? As outlined in our February 2008 SLDI newsletter, “Collaborative innovation is needed to unlock the future as the world is facing a variety of challenges”, and current efforts to create new sustainable land development models hold great promise for breaking the hold of failed outdated economic ideology. According to CityscapeIntelligence, "... One of the greatest challenges is that right now we have a very low level of current knowledge about how to build sustainably in our (Middle Eastern) environment… “ On a more promising note, Cityscape reports that Masdar City, Abu Dhabi is planned to be a fully sustainable city which incorporates the highest quality of life with the lowest environmental footprint. Masdar City will be carbon-neutral, use only renewable energy sources, and produce zero waste. In the United States, news of the nation’s first fully eco-sustainable city has just been announced. At 41,300 acres and a new SLDI member, Florida's Destiny is ranked as one of the state’s largest private land acquisitions and will create working greenspace where the ecosystem is integrated into its infrastructure in order to preserve the overall quality of the environment. The problems – and answers – have been known for many years. It will ultimately be the visionary risk-taking land developers, the business structures we organize, the innovative technologies we use, and the quality of services we retain, that will get us there. Your participation and comments are welcome. Terry Mock Executive Director Sustainable Land Development International www.SLDI.org Promoting land development worldwide that balances the needs of people, planet & profit - for today and future generations.
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Fund symbol
Cory Burnell, MBA on Sep 29, 2009 12:19 PMThe Black Swan fund is a hedge fund, not a mutual fund, and therefore no symbol exists.