Modern financial theory assumes that distributions are elliptical. We show what happens if the assumption doesn’t hold. And the assumption doesn’t hold.
Diversification does NOT reduce risks in the financial market; it causes near-certain long term blowups under any leverage.
Paper with @DrCirillo forthcoming in Nature Physics later this week explaining the point, @mattwridley. Tail exponent <1, even possibly <½ means NEVER issue a single point forecast and NEVER present an average. pic.twitter.com/51GNm1cr5t
ERRORS 101 Never produce a point estimate for risk management, esp. in a fat-tailed domain, rather show statistical properties. Never judge a risk management stance from point forecasts.
The history of Universa Investments featuring Nassim Taleb and Mark Spitznagel discussing tail hedging, their 20+ years of working together, and the importance of risk mitigation in investing.
Nassim Taleb, Universa Investment’s scientific advisor and distinguished professor of risk engineering at NYU, warned of an acute virus spreading throughout the planet in his 2007 book “The Black Swan.” In January, he also warned of the systemic risks of the coronavirus pandemic. He joins “Squawk Box” to discuss.
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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
The fund, managed by Universa Investments of Miami, had a year-to-date return of 4,144% through the end of last month, according to an investor letter from President and Chief Investment Officer Mark Spitznagel that was obtained by Bloomberg. He said Universa was able to cash in many of its positions, locking in the gains, while also keeping in place protection against more equity sell-offs, “one of the tricks of the trade.”.
“The worst thing you can do with insurance is try to time it,” Taleb, a distinguished professor of risk engineering at New York University, said in an interview Monday on Bloomberg Television. “If you don’t have tail insurance, you don’t have a portfolio. Your portfolio is going to blow up.”
That’s a sobering reality check from someone who has long argued that instead of turning to the government for help in times of crisis, big investors and corporations should manage their own risks. His pleas for prudence were largely ignored, though, and most parts of the economy were ill-prepared for a sudden downturn when the coronavirus hit.