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Taleb Black Swan ETF

Mark Spitznagel, who now runs Universa out here in LA, and who worked with NNT at Emperica is launching an ETF that will emulate their style of management for institutional investors.

Here’s how the article starts off:

“With Santa Monica’s trendy beaches a block away, Mark Spitznagel and three fellow traders spend their days placing a couple dozen bets that a disastrous event will rock equity markets or cause inflation to soar. On roughly 95 trades out of 100 they lose money.”

Some takeaways from the text:

First of all, Santa Monica’s beaches are not trendy to say the least, but I guess saying so give a better contrast to Spitznagel’s look. The runoff meets the Pacific ocean in Santa Monica. Anyone who has a brain on the Westside is either heading up to Malibu, or going to the South Bay – Manhattan Beach, Redondo Beach, or Hermosa Beach…but I digress…

What do you think of the mathematical expectation of a Universa trade? If such a trader has a 5% accuracy rate, what does the ratio of the average winner to average loser have to be for the ethos to be worth while investment?

What does that say about the manager’s need to be correct – do you think Spitznagel’s ego is tied up in his need to be correct?

“People have a natural bias to look at returns and not to look at possible losses,” says Taleb. “If you reduce big losses, your overall returns will be higher.”

I’ve always said, that your winners will only look like winners to the extent you keep your losses small.

Hat tip Meb Faber.

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  • Jaytrader

    While it’s possible to make money on 5% accuracy (with a minimum expected R/R of 20:1), I’d  bet you that most traders can’t handle the psychological aspect of being wrong such a large majority of the time.  And I would think it’s amplified even more if it’s someone else’s funds being traded!

  • Nicolas

    It seems they are purchasing a lot of very far out of the money options. I the fact that they need an AVERAGE of 20R in winners just to stay ahead tells me that this is probably not the best strategy. However I would like to see some studies comparing buying far out of the money options, closer to the money options and using stops (Trend following system or other). I totally agree with the concept of Black Swan and the need to protect capital, but I think Taleb sometimes overreaches and he is probably using his fame to promote this fund which in my opinion is not the best to protect tail risk.

  • Anonymous

    I don’t think anyone really knows what strategy he is deploying. I have
    heard from more than one person that they know this strategy involves some
    net credits to offset the constant bleeding.

    At the end of the day, I don’t care how he trades except for the
    mathematical expectation of a trade…which is the point if my blog post.

  • Manuelbravochico

    You certainly right about Santa Monica beach, it’s a xxxthole.
    Taleb is a smart guy, but being smart and profitable trading aren’t necessarily the same thing.
    His former fund made no money for years using similar strategy. Anyone buying otm options in 2008 , 2009 made huge returns. His fund being large is as much a triumph of luck as it is in marketing. I’m not knocking it, but let’s not pretend that he’s some sort of Jim Simons or the like.