Nassim Taleb's Hedge Fund Strategy and Return to The Business

Last month, in this post, I wrote about how Nassim Taleb's writing on options, distributional statistics, and investor misperceptions about risk, influenced my partner and I to move to an options expression of my long-running, consistently superior equity portfolio strategy.

That modification has been doing very well, as I wrote recently, here.

In last Friday's Wall Street Journal, one of its writers discussed Taleb's return to hedge fund management- actually, advisory- after several years away from the business. I hadn't even realized he left!

The firm, Universa Investments of Santa Monica, CA, expects to raise $1B for deployment in Taleb-inspired strategies.

I found the Journal article very reassuring. In it, Taleb's approach is described in more detail than prior articles I have read. It reinforced my feeling that his is a very inconsistent strategy. That is, he is constantly buying puts, losing a little money routinely, in hopes of profiting from the really big market meltdowns. This is what I more or less sensed from my prior reading about Taleb's hedge funds.

In the Journal piece on Friday, however, Taleb's performance is discussed. His last fund earned a 60% return in 2000, then lost money in 2001 and 2002, with only low single-digit gains for the next two years. He closed the fund on the heels of such mediocre performance, during years when conventional hedge funds rack up much higher gains.

Ironically, Taleb's thinking regarding the risks associated with buying call or put options, rather than the underlying equities, made a lot of sense to my partner and I, and we have developed a very effective variant of our equity strategy as a result. However, whereas our returns are already showing signs of tracking with our consistent basic equity returns, they are, of course, many times higher, because of the natural leverage inherent in the use of options.

Thus, Taleb's approach, and, probably, that of the new fund using his ideas, tends to be erratic, and depend upon high volatility to earn large returns.

Our approach is just the opposite. We strive for consistent, reliable gains in any type of market, and try to become less sensitive to volatility.

I can't help but feel that, for investors who do not wish to be forced to time the market, or fund investments, ours is the more attractive approach to earning consistently superior returns in equities or options.