He shut down his fund in 2001. Mark Spitz does the trading. Taleb is an adviser and pitchman. The OTM tail hedge strategy does not work well anyway, which is why he is constantly trying to raise money and promote the strategy (why would someone promote something so aggressively if it were good instead of doing it themselves). In flat markets a OTM tail hedged SPX portfolio loses 10% a year. The skew is too steep on OTM puts. decays too much. That's not to say selling the puts is a smart idea either but hedging is a major cash burner.
Thanks for the comments. So, he bought OTM tails as a hedge? Or he bought OTM tails waiting for a big win? The first means he own SPX and bought OTM puts to hedge, the second means he did not own SPX, only risk free assets and bought OTM puts waiting for a big payout? I think they are different animals. Can you clarify? Thank you.
there are two versions of his strategy: put $ in short-duration bonds and put 1-2% in OTM puts. The second is to put $ in SPX and the 1-2% in OTM puts. The former IMHO is better if the yield is enough to offset the decay, which it almost never is.
Anyone remember Taleb on CNBC suggesting people should take 1% of their net worth and buy deep OTM 10y bond puts each month. "It is guaranteed to make money sooner or later because the Dollar will crater and inflation will go through the roof". That was in 2010. Taleb is one of the worst snakeoil salesmen.
The best is when his response to criticism is; hey I am making money out of this and you are not. You know, instead of revealing performance numbers...
What was the duration of his puts? I want to do some backtest to test thing out and see if he is full of it or there are regions where it may work? Thanks.
The duration is 60-80 days. There is a post here showing the backtest using TOS thinkback . It did well in august 2015 but badly every other time of the year. http://greyenlightenment.com/does-tail-hedging-work-it-depends OTM SPX puts decay insanely fast due to very high skew . SPX OTM calls also decay very fast. The conditions that made the method work well in 2015 have never been repeated in the past 8 years of the bull market.
It's a well known story, he was selling 10-15 year ATM puts on major indices. Some of it was in vanilla form and some of it was on a basket of international indices that were crossed into USD. Just like other long dated vol sellers (e.g. HOOP) those are sophisticated trades. In this case, a lot of the pick up came from financing arbitrage since at the time he was not posting margin (and a lot of dealers neglected this fact) and the structures where well thought through.