Perhaps an oversimplification but basically you short the market at all times, losing a little money every month when times are good, but cashing in like crazy when something disrupts the market. Takes a pretty strong stomach to play that game.
Yes this is right. They buy puts and keep rolling them forward indefinitely waiting for things to go awry. The premiums on the puts eat into their overall returns in the hopes that one day there will be an event that makes back all those lost premiums. They aren't really disclosing enough information to be able to evaluate whether or not it actually works, so I suspect this is just a marketing ploy to get more clients.
Not really. Dollar cost averaging means that you trickle money into the market rather than putting it all in at once.
For example, suppose you got a $10k net bonus at work, and decided to put it all into the stock market.
One approach is just to put it all in right now. If the market generally moves up for a while that works out fine. But if you did this right before a big dip, you now spend a while waiting for things just to get back to even.
If you took a DCA approach you might instead invest $500 every week for 20 weeks. Then if there’s a big dip, only a little of your money was invested with “bad timing” and much of it probably came in during the dips and therefore was a better deal.
Note, though, that you get the opposite effect if you consider an investment that would have happened right before a giant boom.
So basically DCA means you’re going to just track the market closer and have less timing risk compared to making larger less frequent investments.
It's very different. Dollar cost averaging (if you really follow it) has been very low risk for a very long time.
What Taleb says he's doing (betting on events that everybody assumes will not happen) tends to produce (nearly) guaranteed losses each year, with the hope that one day you make it all back and more.
Well, just hedge all your positions, every year. It's actually really simple, if you buy a share of AAPL lets say, and it cost you ~$300 (pre-COVID), decide how much you want to spend on the hedge (let's say 1/3rd, so $100), and buy a LEAP (option that is >=1 year out) put.
Options are riskier than stock, so they tend to pay out much higher. With such an unexpected drop in march, you could have bought a LOT of very very cheap (let's say $1/contract to make the numbers simple) put options for like AAPL $250 let's say. Those options are cheap because they generally never hit, and even in early the market had not priced in the possibility of coronavirus being a global problem of this scale. If that contract is worth $10 later (which is still a very cheap option), you've made 1,000% return.
> A tail-risk hedge fund advised by Nassim Taleb, author of “The Black Swan,” returned 3,612% in March, paying off massively for clients who invested in it as protection against a plunge in stock prices.
All institutions hedge, it's just a matter of how much they hedge -- there are also some institutions that are intentionally "long volatility" (which means they expect volatility to increase). One way you could do this is to buy shares of a speculative instrument like $TVIX which is 2x fund of a thing called $VIX (the "Volatility Index"), you're going to lose money/maintain holdings (there's a thing called roll risk and other risks to consider just holding these instruments), but in a month like march when $VIX goes from ~$10 to ~$80, you're going to have a ~800% return.
Super late, but AAPL arguably shouldn't be within 10% of it's all time high. Arguably it is at the current price because of unprecedented swift and decisive action on the part of the federal reserve and congress.
The Federal Reserve slashed the federal funds rate to near zero and starting "unlimited QE". Neither of those actions amount to buying equities directly, but them taking such an active part in the corporate bond market (they now have the ability to purchase investment grade bonds, though they hinted in a recent meeting that they didn't actually purchase any) has done enough to spur companies into raising cash.
Congress's CARES act and other bills actually lend 4.5B (500B leveraged up ~10x) to corporations with little oversight.
On top of all of this AAPL actually has a ton of cash on hand, so they are arguably a better buy than other companies. Arguably the downturn in march was panic selling and/or selling to cover margin requirements, but with the uncertainty on how the virus would affect various industries and for how long, de-risking is worthwhile.
Also, no need to spend massively on hedging -- hedge according to your risk appetite.
If you don’t need to sell anything from your portfolio in the next 5-10 years, why hedge? The vast majority of investors should be focused on the long term, so hedging is just a cost that reduces their returns.
At the beginning of the period yeah it may not be necessary to hedge, but as the fund allocation shifts it's probably a good idea.
I have a sneaking suspicion that even if every single investor was long-term focused, the staggering of the starting and restarting of various funds would make the action look sinusoidal.
Agreed -- I did not mean to imply that it wasn't expensive -- but what you do is bake this into the positions. Entering a position without a hedge is dangerous, though of course equities are much less likely to have drastic drops (depending on the company). Hedging is still a good idea for the usual investor -- but obviously don't take losses on puts for years trying to time a downturn.
One thing I didn't note is the difficulty in timing -- if you held your puts too long, they would have gone back to zero with the insane rally we saw last month, for many reasons.
The fund would not have such a simple construction - but you can build a simple tail risk strategy with options. Buy deeply out of the money puts on SPX and periodically roll them. You are now betting on a tail risk wiping out the market (although paying a continuous premium to do so).
From what I have read, Universa's clients are institutional investors and super rich people. Not sure how easy this is to reproduce as a less sophisticated investor.
One of my good friends follows a strategy like this by simply buying puts against SPX. He is very bearish on the market in general, and has missed out on a lot of growth in the last decade, but in his case it did “finally pay off” recently.
As with any other strategy, though, it’s not really valid to compare just the recent months, you’d have to evaluate his total return over say the last ten years, and I don’t know how that stacks up.
I think it's very difficult. You're looking at losing significant money 9 years out of 10. (Or 20 years out of 20, who knows? It's black swans baby.) So you can only do this with a very small amount of money. How much time can you afford to spend managing say 3% of your total liquid assets?
