Why The New Fetish For "Black Swan Insurance" Means Markets Are BEGGING For Another Crisis

Nasim Taleb

Photo: www.fooledbyrandomness.com

Today Bloomberg reports on the flood of financial institutions offering some version of what you might call Black Swan insurance — products, funds, etc. designed specifically to hedge against or pay off in the event of tail risk.PIMCO is the latest to launch a Black Swan product, though of course it’s Mr. Black Swan himself Nassim Taleb who has been at this the longest, with his various funds (Empirca, and now Universa, which he advises) designed to pay off in the event of an extreme event.

There’s a lot to be sceptical about here, quite obviously. For one thing, as Felix Salmon recently pointed out, designing these products are really, really, hard, since even if you can basically predict the crisis, knowing how various assets will actually move in the event of them is dicey, at best.

What’s scary are not the products themselves, but rather what the products indicate about Wall Street’s mindset.

Nobody wants to de-risk, in the sense that they want to actually take some money off the table. Instead — and this is something FT columnist and author John Authers argues — it’s all about pricing and quantifying risk, and of course hedging against it.

And hedging against risk, and actually de-risking are not the same thing.

The proliferation of these products (Deutsche and Citigroup are also offering them) is not just an indication that Wall Street is peddling fear, but that it continues to pedal the idea that the solution to risk is to buy another product.

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