Thursday, May 13, 2010

Nassim the Dream Top Tics It

There was a big story in the WSJ about one of Nassim Taleb-affiliated fund Universa Investments LP (he's merely an advisor, but he takes credit when it does well and it's run based on his long-Black Swan theory). 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: 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.

All the while, however, he makes huge fees, because 1% on $4B is a lot of money, and his wealth will serve as proof that he's an investing genius. More importantly, he then selectively presents to a credulous press he makes billions off his market savvy.

Gee, someone should write a book about blow-hard traders who misrepresent their track records and take excessive risk with other-people's money, all due to cognitive biases they are too shallow to notice in themselves. Oh yeah, Taleb has done that! I guess his insider status gives him better insight.


Anonymous said...

YESSS!!!! Nassim is like one of these geniuses who always comment on CNBC that the stock market is about to tank. From time to time the stock market has bad days and then everyone marvels at how prescient they were.

crookery_ said...

Well he might be down 50% on the put but if it was set up as a delta neutral trade the fund could well have cleaned up trading the gamma over the 5-10% move in both directions. I know you understand this, but you omitted to debate the point.

I'm not saying that's what happened, or even opining on Taleb's skill or not, I am simply pointing out that if you are going to criticise it you'd better make sure you know exactly what the fund did.

David said...

Eric, will you consider responding to Barry Ritholtz' post, "Get me ReWrite".(13 May) Your views are markedly different, and there is $100,000 up for grabs.

Eric Falkenstein said...

that's a silly stunt. I too, will give $100k to someone who can prove to me that the CRA was orthogonal to the housing bust.

Anonymous said...

Eric thinks that trying to increase lending to underserved communities is a self-evidently terrible idea that will obviously create an unsustainable housing bubble, but he also believes that professional investors had no sound way of predicting that the housing market would crash.

A foolish consistency is the hobgoblin of little minds.

Anonymous said...

(1) Government frigtards should stay out of the housing markets.

(2) Financial markets are generally efficient.

I don't get how these are "inconsistent" theses.

Anonymous said...

Let's start with:
(1) Government frigtards will predictably mess up the housing market if they get involved.
(2) Financial markets can generally foresee predictable events.

And add:
(3) Government frigtards get invovled with the housingmarket.
(4) Financial markets do not foresee market collapse.

I think I see an inconsistency already...

(5) Eric argues that the market collapse was in some sense unpredictable.

And there's another one.

It is true that (2)/(4)/(5) are consistent, and that (1) is consistent with (3).

Anonymous said...

The most remarkable aspect of the WSJ story, assuming it was generally factually correct, was that they were chasing the market down. I'd have thought, based on their media comments, they'd always keep an insurance-like ambient long-vol position in place, rather than chasing the market up and down herky-jerky.

Anonymous said...

> Financial markets can generally
> foresee predictable events.
Death is a predictable event that very often appears unforeseen...
IOW, that word does not mean what you think it means.