Developing Tail Risk Strategies

Discussion in 'Strategy Development' started by etfarb, Apr 30, 2013.

  1. etfarb


    Just finished fooled by randomness and taleb is a god.

    I want to focus more energy on developing tail risk strategies in the short term.

    How should one approach such a task?
  2. newwurldmn


    Most of these strategies lose money. Even Taleb has been associated with 3 different funds - the first two lost 4%/year for so many years that they shut down.

    And now these strategies are really en vogue due to 2008. So I would wager that a lot of people are buying tail risk at stupid levels not really knowing what they are doing.
  3. etfarb


    I agree and thats kind of what makes it so appealing (if its used properly)

    I'd argue that one of the biggest downfalls with this strategy is that the duration of these trades are way to long which creates problems for a tail risk only fund or on the reverse a fund who deploys tail risk as one of their strategies and dosn't fully understand what their doing.

    This may sound really naive and dumb of me but is a tail risk strategy nothing more than buying way out of the money options in hopes of a disaster?

    I trade on a really short time frame (intraday - days - week(s) and nothing longer than that) - Given how cheap option puts are right now - a tail risk strategy is something on my mind
  4. newwurldmn


    It implies hedging for a disaster, but it is generally betting on the unlikely events. Universa (the latest fund Taleb is associated with) did well in 2012 being long tail risk in commodities as they ripped to the upside.

    In general people buy into them to hedge long only or short risk portfolios. They are willing to spend 4% to make 20% in a collapse. Problem is that those 4%'s add up and over time people get frustrated.

    Secondly, I think rather than investing in a generic tail risk fund, it's better to hedge for your particular strategy.

    Taleb is as much of a showman as he is a mathematician. A few of the people I know who went to Courant didn't think highly of him as a professor.

    I am long SPX gamma here. I think it's cheap. But that's not always the case.
  5. etfarb


    I havn't looked at there recent trades but universa is an interesting fund

    only 20% eh...? I would have thought that they are attempting to bang out north of 40-50% returns with very minimal risk.

    I wont get into the details of my predominant strategy on this thread but the bread and butter of my operations revolves around a divergent trade where I only take one end of it. I've been doing some research and work to attempt to maximize this trade through using options on the other end (hence the interest in tail end risk)

    Talebs an interesting character. I'm sure he knows thing or two at math but I can't imagine him being a good prof. He does come off a tad bit pompous in the media

    Are you long or short SPY for the next week or 2?

    I think tomorrow will give a lot of clues going forward
  6. Tails tend to happen in the direction of the trend.

    Volatility tends to spike up as tails appear.

    Tails seem to appear when there is maximum opportunity for humbling as many over-confident speculatorz possible.....

    ....... memories of 2007 as I was about to graduate with an engineering degree and couldn't buy a house, because the suckerz were exclaiming, en mass "buy now before you get priced out of the market forever".....

    The Market has a glorious sense of irony, because revenge is just too sweet :mad: :D
  7. Taleb's tail strategy was to take low risk and at the same time take large risk. What Taleb has done in the past is buy T-bills, and use the interest income to purchase OTM options. I do not know if he still uses this method.
  8. you can learn alot from all kinds of people.. i learned a bit from Taleb... i enjoyed his books.. i have read all of them .. if vol is expensive i sell it.. if its cheap i buy it... if i can bring convexity back into my book in the far out wings in a cheap way i do it.. how to construct a book that survives a crash is very important... i don't always know what to do so i stay small.. the less i know the smaller i get...... i read that somewhere... i did it.. and it worked.. newworld told me to trade less.. that made sense .. so i did it.. and it worked.. ... i've researched every kind of tail risk strategy i could possible find.. ratio backspreads, vix options, trying in uncorrelated assets like tlt and spy ... offsetting short delta in one trade with another long delta ... my main tail risk strategy is just to be alive and liquid when the blood is being cleaned up off the streets.. thats basically it..
  9. Butterball


  10. newwurldmn


    It's not minimal risk when you think about the timeline. On the day of an event, you have made 10x your money. But there are many many days where you lose your "ante." T

    he risks are generally definable (unlike other strategies).

    Like I said most long tail funds (except market making funds) ultimately shut down due to long draughhts in performance or inability to get the big score in the event.

    If you are better than others who are doing it (unlikely) or if you have the tolerance to suffer the losses (year after year) then the strategy might make sense for you.
    #10     May 1, 2013