On Universa’s Black Monday

Last week Zerohedge reported that Nassim Nicholas Taleb’s hedge fund Universa Investments LP made a $US1 billion gain from last week’s Black Monday.

 

Taleb’s success has several potential lessons given his Incerto philosophy:

 

  • Find a contrarian yet possible / plausible future that has optionality and positive expectancy – such as a significant stockmarket correction or VIX change (vega or volatility arbitrage).
  • Map out the possible / plausible future as an event chain or Bayesian belief network / graph  where there is a rapid change in the rate of change (the gamma or second derivative of the delta in options pricing) — such as a Wyckoff mark-down / deleveraging / flash crash event.
  • Use game-theoretic reasoning to foresee how others in the event chain or Bayesian belief network / graph will act.
  • Use ‘out of the money’ optionality to make small losses during regular conditions with outsized gains when your event chain or Bayesian belief network / graph occurs – and the ‘out of the money’ optionality becomes ‘in the money’.