The Wall Street Journal ran a story sourced by “a person familiar with the matter” wherein a Black Swan fund – which seeks to profit from extreme outlier negative events – has earned a billion dollars for the year, with most of the gain happening during the volatility of last week’s market correction.
This is the kind of story that captures the imagination of investors, who are always looking for scenarios where they can have their cake and eat it too. Being invested for the ups of the stock market while simultaneously being positioned to make a killing from the next crash is a Holy Grail of sorts. If the Wall Street Journal’s account is true, then perhaps the grail quest is at an end.
But probably not. The math may not work, according to people who’ve actually attempted to determine how it could be possible that this fund actually did what it says it did. TastyTrade’s Tom Sosnoff and Tony Battista examined the article’s claims and the actual activity in the options markets for a must-watch video. Comparisons to Bernie Madoff are made, along with a good discussion about why Black Swan strategies in general are harder to actually operate than they are to advertise.
I’ll let you read the article and then watch the video before deciding for yourself. No matter what conclusion you end up with, this is compelling stuff.
First, the billion-dollar profit claim, from August 30th 2015:
Next, some background from the Journal on the fund manager mentioned in the article. You’ll notice Nassim Nicholas Taleb distancing himself from the fund that uses his “Black Swan” concept for its marketing in the tweet embedded at the bottom of the post.