A Goat Farmer Built a Doomsday Machine That Just Booked a 4,144% Return | Hacker News Reader

A Goat Farmer Built a Doomsday Machine That Just Booked a 4,144% Return

forbes.com

37 pointsrchaudhary19 comments

Funnily enough the "trick" with this kind of fund is to be able to survive good times.

A firm I ran actually had a fund that did what's described here. In fact Taleb himself came to visit us.

Your main problem is you're selling a lottery-like return. The professional investors that you meet would have to explain to their committees every month why they're losing money. If a collapse happens every 10 years, there's a while between.

So then your problem is "How do I credibly demonstrate that this strategy is worthwhile, and that I'm the best guy to do it?". Because this isn't going to be the only fund offering this kind of protection.

This is so true. What’re your 1yr, 3yr, 5yr returns and vol? In these strategies a consistent track record makes no sense because you’re planning for events with different magnitude of impact and frequency than the norm.

> Funnily enough the "trick" with this kind of fund is to be able to survive good times

That's the trick to every fund. Whether bull or bear or neutral. It's weathering the storm.

If you are a small growth fund during a recession, you're ability to hold onto your investors/capital determines whether your fund survives or not. It's the same going the other direction.

Those able to weather the storm win big later on and look like geniuses. Those who cannot, lose and fold and look like fools.

That's why it is important to size one's bets in order to survive. Undersizing one's bets can reduce the windfall; oversizing one's bets can wipe out, leaving nothing to bet further. Practical people(unlike the theorists of Efficient Market) have studied this for a long time. That's what Kelly Criterion about portfolio management. Ed Thorp, first, utilized this.

This hedge fund is selling financial insurance basically. You spend money with them and get a huge payout if things collapse. This is an option to buy low vs buy low.

The article says they were ahead of the S&P 500 up through December 2019 so they weren't simply waiting around for the big one.

Imagine if the market incentivized intelligent people to build useful things rather than lotteries on top of known cognitive weaknesses. As one commenter pointed out, the trick isn’t identifying or executing this strategy. It’s having the ability to brand and sell it in such a way that the investment seems palatable to pension and sovereign wealth funds. No mean feat but I struggle to find it admirable.

Capital allocation is hugely important for a modern economy.

Without financial markets, intelligent people would barely have any idea what to build (let alone raise capital necessary to finance their innovations).

If only we could have financial markets. I mean real ones, without massive money printing and similar manipulation by central banks.

It's actually not. We weren't remotely prepared for the pandemic which is laying waste to people and the economy. That's a complete failure of the modern economy.

In what way was the economy unprepared?

Let's consider the current major crisis (man made climate change). A lot of smart people agree that we're here because markets make us do the wrong thing.

How does this hedge fund (or even the existance of such a fund) provide such signals to an inventor or business founder?

Translation: Hedge fund manager bets on financial catastrophies, wins big because of Coronavirus pandemic.

The challenge is surviving long enough to score a meaningful payoff.

Be rich to get richer, as usual.

For certain risks you sadly need a certain financial security, same for launching startups. I'd love to be a founder, but I need a stable income for two.

Correction Northport is not in the Upper Peninsula of Michigan, its squarely in what is considered the Northern Lower Peninsula.

How do these guys handle counterparty risk?

You might theoretically have made a bunch of cash when the markets crash, but that's exactly the time a bunch of financial companies go bankrupt and can't pay out.

kelly criterion is at work.

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