During times of market turbulence, as seen in the last couple weeks, rumors typically circulate throughout the investment community on a wide range of topics.
Obviously, the potential reasons behind an increase in volatility is usually at the top of every list. As is the forecasted duration of such volatility. However, the rumored winners and losers from dramatic market fluctuations is another extremely popular subject.
On a recent episode of the tastytrade network’s You Gotta Be Kidding Me, hosts Tom Sosnoff and Tony Battista put the spotlight on one particular rumor crossing the financial wires that indicated a Black Swan Fund had made gigantic profits during the recent market nosedive.
Leading with an estimate that one particular fund had made upwards of $1 billion during that rollercoaster is certainly a good way to grab attention.
However, factual details regarding this supposed boondoggle were fewer and far between.
On the episode, Tom and Tony put these claims under the microscope to judge for themselves the potential accuracy of such outsized returns.
In an article from September 4, 2015 on TheReformedBroker.com, Joshua Brown posts his article, "Did a Black Swan Fund really just make 'a billion dollars?'" In the piece, Mr. Brown includes a link to the original Wall Street Journal article by Juliet Chung that circulated these billion-dollar claims along with a link to the tastytrade program focusing on them.
If you don't have a Wall Street Journal subscription, you can access another account of the Black Swan Fund's supposed winnings by reading an article entitled "Nassim Talen's 'Black Swan' fund made $1 billion this week" published by MarketWatch.com with the same byline.
Regardless where you access the background on this riveting tale, the tastytrade episode on the content is a must see.
On the show, Tom and Tony start off helping viewers understand exactly what a Black Swan Fund is as well as giving additional background on the funds typical returns over time. In short, Black Swan funds can clean up during periods of dramatic volatility, but tend to book consistently small losing returns during the more lengthy, non-volatile periods.
Tom and Tony point out on the show that when a fund is charging fees to lose money on a consistent basis, one needs to really deliberate on the value of such an investment.
One graphic from that day's show is particularly gripping, as shown below:
As you can see from the above, tastytrade research shows that if a Black Swan Fund were to lose 10% (plus a 1.5% management fee) for five years, it would require an 86% Black Swan event just to break even.
The hosts of You Gotta Be Kidding Me build on their theoretical rebuttal of the billion dollar claims by showing just how profitable it has been to own out-of-the-money options over the last several years. Suffice it to say, it's not been a highly successful trade in probability terms.
Furthermore, Tom and Tony also model hypothetical positions in SPX options to highlight just how many contracts would be needed for such outsize returns and how that compares to existing open interest.
As far as understanding Black Swan funds and the recent claims being circulated in regards to the winners from recent market activity, there isn't a better place to start than this tasty programming for a better grasp of current events.
The full episode of "You Gotta Be Kidding Me|Black Swan Events" can be accessed by following this link.
As always, we welcome any and all feedback on this or other tasty trading topics that might be on your mind.