Janet Tavakoli of Tavakoli Structured Finance has emailed us the following:
A recent GQ article quoted Nassim Nicholas Taleb as saying that in the falling market he “made $20 billion for our clients, half a billion for the Black Swan fund.”
I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: “The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.” This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ’s article. The total gains could be a tiny fraction of what Taleb loosely describes as “face value.”
Why is GQ’s mistake important? In my opinion, public claims of enormous private hedge fund gains require credible back up, and one would think that GQ would have known that before it inaccurately quoted Taleb as having made a bell ringing gain of $20 billion for clients. Presumably, the error referred to outside clients, not the black swan fund itself, but it could have the side effect of attracting investors to the black swan fund, similar to advertising or salesmanship.
The black swan fund’s strategy is purportedly to buy out-of-the-money put options on stocks and broad market indices and hedge tail risk for clients. The strategy may produce long periods of mediocre-or even negative-returns followed by a large gain and vice versa. No one can tell you for certain exactly when (or for how long) large gains are possible. Initial success in a newly created fund may not be replicated in the future, and there is always the problem of scaling. Scaling refers to the fact that an individual fund may make a high return on an initial investment, say 100% on $100 million, but lose 10% on $1 billion.
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You can read the rest of Tavakoli’s article here.
And the GQ article in question is available here.
One observation from us: Taleb’s fund, Universa, has only ever been worth a few billion, so it making $20bn was always going to be a stretch.
Furthermore, while Clusterstock seems to be hinting that Taleb was “busted” for exagerrating his returns, we don’t think that’s the case. There’s little point to that given that the fund isn’t exactly a stranger to lacklustre returns — Taleb’s whole strategy is to profit from outlier risk, making little or no money in times of normalcy. Also, it seems pretty clear from Tavakoli’s letter that she is blaming GQ — not Taleb.
In fact, Taleb himself is now calling the error a typo on his website:
Most representative overall profiles: Will Self in GQ (with typo on the “billions”) & Bryan Appleyard in the Sunday Times
Given FT Alphaville’s own experience with GQ, we think that the magazine does have a tendency to misquote numbers (and titles).