Bittersweet Story: Nassim Taleb's Investors up 50% YTD

Investors advised by "Black Swan'' author Nassim Taleb are up 50%+ this year.  The secret? Buying out-of-the-money options on puts and calls. Taleb's outlook: We would like society to lock up quantitative risk managers before they cause more damage.

His blog is a bit out of control, but if you want his book, here you go:

The Black Swan: The Impact of the Highly Improbable: Amazon (US), Barnes and Noble (US).

Read the rest of the story at Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDVgqxiT9RSg&refer=home

Taleb's strategy is based on buying out-of-the-money options -- puts and calls whose strike price is either lower or higher than the market price of the underlying security. A put option gives the buyer the right, though not the obligation, to sell a specific quantity of a particular security by a set date. A call option gives the right to buy a security.

The Black Swan Protection Protocol bought puts and calls on a portfolio of stocks and S&P 500 Index futures, along with some European shares. The Black Swan Protocol doesn't rely on commodities, currencies or insurance on bonds known as credit default swaps, Taleb said.

``We refused to touch credit default swaps,'' Taleb said. ``It would be like buying insurance on the Titanic from someone on the Titanic.''

White Swan

The Black Swan strategies are designed to limit losses to a few percentage points. Some investors did better than others depending on when they decided to lock in profits, Taleb said. The returns have enabled Universa to line up more money from investors in the next month, Taleb said.

As a trader turned philosopher, Taleb has railed against Wall Street risk managers who attempt to predict market movements. Even so, Taleb said he saw the banking crisis coming.

``The financial ecology is swelling into gigantic, incestuous, bureaucratic banks -- when one fails, they all fall,'' Taleb wrote in ``The Black Swan: The Impact of the Highly Improbable,'' which was published in 2007. ``The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.''

Taleb said the current crisis is a ``White Swan'', not a Black Swan, because it was something bound to happen.

``I was expecting the crisis, I was worried about it,'' Taleb said. ``I put my neck and money on the line seeking protection from it.''

Taleb is angry that Wall Street is continuing to use traditional tools such as value at risk, which banks use to decide how much to wager in the markets.

``We would like society to lock up quantitative risk managers before they cause more damage,'' Taleb said.