The eponymous author of the Cassandra Does Tokyo blog is in fine, Aesop-worthy form with a re-telling of the Three Little Pigs, in which a Big Bad Black Swan takes over from the Big Bad Wolf.
Selected snippets:
Once upon time there were three little pigs. One day, they gathered around their mother (who was a CFA as it happened) and listened to her say: “Little pigs, it’s now time you all went out into the world and built yourselves portfolios of your own. “Luck be with you. But…you must be careful to watch out for the Big Bad Black Swan.”
So the three little pigs set out on their merry way to build themselves portfolios that would make their mother proud, withstand the prevailing shocks of the day, and test of time, and produce fine cocktail party conversation when they socialised with the other pigs.
The first little pig built himself a portfolio of AAA rated US RMBS securities backed by less-than-high quality mortgages which he was told (by the rating agency and the bond salesman) had excellent modelled-risk characteristics for the additional yield; Chinese shares (for their future growth potential); and a basket of US Municipal and Financial Guaranty insurance companies whose underwriting record the first little pig assessed with hindsight “was near-perfect”, rarely having to pay a claim (e.g. ABK, MBI, AGI. MTG, and PMI).
The second pig, after leaving home, was suspicious of assuming too much market risk, and so took a different approach and built himself a portfolio of blue-chip hedge funds with pedigree managed by ex-Harvard Superstar Jeff Larson; ex-Morgan Stanley superstar, Vikram Pandit; ex-Goldman Partner Ron Beller; and Bear Stearns bravado Ralph Cioffi; as well as a wodge to UBS superhero, Jon Wood, on top of a “safe” multi-strat called Amaranth, managed by Nick Maounis (because he was a conservative pig at heart, and liked the diversification that a multi-strategy arbitrage-oriented fund afford him).
The third little pig was cleverer than her siblings, and sought out the the strongest materials with which to build her portfolio. She (quite literally) stuffed it with steel producers, commodity ETFs and other physical things that hurt when you dropped them on your foot, global mining and resource companies (especially Iron Ore and Metallurgical Coal). And she bought potash mines from the Dead Sea to Saskatchewan, a block of apartments across from the Kremlin, and deep-water platforms and GOM fields wherever she could find them. Concerned that she might be top-heavy on “value”, she leveraged and bought a bevy of emerging market shares in Brazil and Russia, and added a short USD vs. long AUD position on top of the highest- yielding carry basket she could fund with JPY and CHF. To round it out, she used her remaining credit lines (in short-term USDs) to buy a portfolio of modern “masterpieces” by Lucien Freud and Damien Hurst along with a couple of renaissance-era triptychs.
So did all their houses fall down? Ask Cassandra.