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Comment by jawns | Hacker News Reader

Yes, it is possible to set up a fund that is structured to produce strong returns during black-swan events.

But outside of black-swan events, you are going to lose money investing in such a fund. It is more like an insurance policy than a traditional investment.

Traditional investors might hold lots of equities during a bull market and fewer equities during a bear market. A fund like this allows you to maintain a more constant percentage of equities, with the understanding that you're spreading your losses over time, instead of incurring more significant losses during a sharp market downturn.

Similarly, you can make some excellent money in a 3x bear fund if your trades are fortuitously timed, since they aim to give you three times the amount their associated index loses in a day. But it is not a buy-and-hold investment. If you buy and hold, your money will eventually disappear.

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I think the thesis of this type of trading is that black swan events are underestimated in the market, making far out-of-the-money options (i.e. insurance against unlikely events) sufficiently cheap that you can make money in the long run even if you lose money on 99.9% of days.

This is an extension of 'the market can remain irrational longer than you can remain liquid'. You could make money in the long run if you have the funds to get there. If we consider that this and the 2008 crisis were black swan events, then we could expect them to occur perhaps once a decade, which from now could be up to 20 years for the next one. By the end of that 20 year period the amount you have remaining to bet on the black swan event would be severely limited by the preceding 2 decades.

If you aren’t leveraged, it’s trivial to ride out crashes. Why drag your returns down with expensive insurance?

Yes, Taleb's entire life work is premised on the fact that people's mental models of probability distributions are not fat-tailed enough to match reality. He believes that such strategies should be positive in expectation (aka, should make money over the long run).

I'd say it's even more basic than that. What I take from it is how to avoid ruin and potentially profit from the tail event. I don't see it as a means of increasing wealth even though it can have that effect. It's about preservation first and foremost.

The term I've heard used is Kurtosis Risk: https://en.wikipedia.org/wiki/Kurtosis_risk

“ Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.”

The time period of March 2008 to March 2020 is cherry-picked. Yes, of course, the return is going to look impressive right after a black-swan event. That's why the fund exists. But in ordinary times, you're going to lose money. Which is not necessarily a bad thing, any more than it's a bad thing to "lose" money to a term life insurance policy but never pay out because you don't die.

A previous article on them stipulated that through December 2019 they were still up vs the market.

“After the March payday, its flagship Black Swan fund has produced a mean annual return on invested capital of 76%* since the firm was created in 2008. It’s a good result, but if you were going to make the same calculation as of Dec. 31 2019, the long-term compounded return would only be marginally better than that of the S&P 500 over the same time period.”

https://www.google.com/amp/s/www.forbes.com/sites/antoinegar...

As a sibling commenter posted the fund actually presents itself as insurance - you don’t put all your money into it, you only put a small percentage. That percentage would indeed eventually disappear if you never refreshed it, but keeping a percentage in this “insurance” hedge would also mean you basically shrug off giant downturns like Covid.

Yes, I'm not disputing the article. I'm summarizing it and pointing out some caveats for people who aren't familiar with how this works.

The article addresses that point.

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