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Comment by karpierz | Hacker News Reader

Why isn't Taleb a billionaire if he's great at predicting events that are surprising to the market (IE, aren't priced in)?

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"Aug. 30, 2015 8:54 am ET - The recent market rout caught some star Wall Street traders by surprise. But not a hedge-fund firm affiliated with “The Black Swan” author Nassim Nicholas Taleb, which gained more than $1 billion on a strategy that seeks to profit from extreme events in financial markets."

https://www.wsj.com/articles/nassim-talebs-black-swan-fund-m...

"April 8, 2020, 11:28 AM EDT - Nassim Taleb-Advised Universa Tail Fund Returned 3,600% in March"

https://www.bloomberg.com/news/articles/2020-04-08/taleb-adv...

The Universa figure is extremely misleading, and it's either some appalling marketing job or appalling journalism.

Universa is not a traditional fund, it is a so called "premium spend" structure. With a traditional fund, you give them money, and they try to make some profits. At a later time, you can retrieve the profits and original investment.

With Universa, you give them money as you would to an insurer, that is, you cannot back that original investment back, you only get the profits they make on it. It is literally insurance premium.

This is a very important distinction because when returns are traditionally quoted, they are not based on the premium the fund spent buying financial instrument, but the total capital invested. In the case of Universa, their assumption is that you'll spend 3% of your capital with them as insurance premium. It is therefore much more clear to quote the returns based on the capital insured, which results in a much more modest (although still great) 120%

he has made money off his hypothesis in '87 and most recently in purchasing underpriced tail hedges. the most recent fund he advised was underwater for many years before scoring a total 230% return over life-of-portfolio from the action in march '20. he never claimed to predict events that are surprising; he only claimed that the pricing of the bets for 3+ sigma events was wrong, and he has monetized this a few times in his career.

as a practical matter, it is hard to be a billionaire making such bets. the time decay of derivatives positions is working strongly against you and you have to structure your position very efficiently. you are not likely to have any LPs who are willing to take such huge drawdowns in the down periods right up until the blowup. so it is possible to make millions off such bets as his but not billions owing to the nature of option Greeks and the psychology of your typical LP.

It'd make no sense to price this in because while a pandemic eventually is inevitable, the timing is wildly uncertain.

He isn't great at predicting events that are surprising to the market. His hedge fund went under due to low returns. However, he did bring attention to the idea of black swan events, the possibility of which is too often ignored or overlooked. He is famous for bringing a particular school of thought to the forefront of our conversations about predictive models, not for specific predictions he himself made.

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