“Black Swan” hedge fund has a good year

For most of October, it seemed nearly everything that could go wrong with the markets did. But the rout turned into a jackpot for author and investor Nassim Nicholas Taleb.

Mr. Taleb last year published “The Black Swan,” a best-selling book about the impact of extreme events on the world and the financial markets. He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October’s.

Separate funds in Universa’s so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. “We’re discovering the fragility of the financial system,” said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

…While the black-swan strategy has paid off handsomely this year, it hasn’t always. Mr. Taleb’s previous fund, Empirica Capital, which used similar tactics, shut down in 2004 after several years of lackluster returns amid a period of low volatility. The strategy may face another test after the current bout of market turmoil.

The task for the fund’s managers is to persuade clients to stick around after their big gains. Historically, such dramatic downturns have been rare events, occurring only once or twice a decade.

Homework problem: what is the long term after tax return from the above-outlined Taleb strategy? I think Taleb’s “Fooled by Randomness” should be studied by all investors. I’m not sure that, e.g., the Universa Investments strategy is right for a 30-something investing for retirement. But strategies like Taleb’s should be evaluated as an asset allocation option by the retiree 60-something focused upon capital preservation. I.e., an investor who is willing to lose some capital to inflation every year while insuring against the sort of market turmoil we’ve seen in 2007-2008.

Based upon the “availability bias” my risk-free prediction is that funds like Universa will be more popular for the next few years. That represents an entrepreneurial opportunity!