So as you know, the Nassim Taleb-associated hedge fund Universa reportedly made some big bets on Thursday in the minutes leading up to the “flash crash.” It’s even been suggested that these bets may have precipitated the chain of events that lead to teh crash, which has been great media fodder: The Black Swan causing a black swan!
Of course, that’s hogwash. The market should be able to withstand a hedge fund making some bearish bets. Blaming Taleb is pretty silly.
That being said, it’s worth wondering how Universa did on that bet.
Eric Falkenstein, a regular Taleb gadfly, thinks the fund might have gotten crushed.
Supposedly, they made a big trade around 2 pm EST on Thursday, just before the market tanked. As the electronic exchanges were spotty a large order like this didn’t help, and wasn’t very savvy on a pure tactical level (ie, don’t make big trades when systems are down).
Anyway, lets look at the tape. Here’s an S&P 115 June Put option from Thursday. Around 2 PM EST, it was price about $4.30. It went to about $8 (one bizarre print at $14), and is now about $2.50. Whatever he bought is probably down 50%.
I would bet that his Universa Fund will go exactly like his Empirica fund: first year, up big in year 1, then slightly negative for the next five, when it is 5 times as large. Net net, it loses dollars, and like Emprical will have a Sharpe below the Hedge Fund Mendoza line of 0.5.
That last part, of course, is speculation. Taleb’s been doing the rounds on Bloomberg TV and CNBC talking about last Thursday, but he’s been pretty coy. This is probably the most interesting part.