As Eric Falkenstin reminds us, Nassim Taleb’s Black Swan Protection Protocol fund was a star back in October of last year for earning huge gains being long volatility.
WSJ: Separate funds in Universa’s so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. “We’re discovering the fragility of the financial system,” said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.
The Volatility Index (VIX) peaked in November, and then has essentially collapsed relative to where it was. Has Taleb remained long volatility the whole time with these funds? With the Black Swan funds we’d expect so, given that appears to be part of their mandate.
We wonder what the year to date performance has been since we feel that 65% or 115% gains for a major financial crisis might not have been good enough actually, once one considers the imagined rarity with which such a crisis might occur.
Given that Taleb’s strategy appears to generate frequent small losses combined with infrequent large gains, how many years of losses did 2008’s return make up for? Nobody knows. Maybe it all works out fine.
But in the absence of data, Taleb and his ilk (like Paul Wilmott) are able to make non-disprovable assertions such as: “the market is undervaluing future black swans” or “Wall Street is still relying on all the old failed models.” This can go on for a while, until the next crash, at which point Taleb can be hailed as a genius again.
In the meantime, things seem quiet, even after recent mention of a new fund being launched by Universa to bet against treasuries.