The Financial Report
By Janet Tavakoli
Taleb’s Stranded Swan?
- Posted June 3, 2009
- By Janet Tavakoli
Updated June 2025
Following my analysis of the false $20 billion performance claims, additional questions emerge about the sustainability and scalability of Nassim Taleb’s black swan fund strategy. While the mythical gains have been debunked, the underlying strategy faces even more fundamental challenges that investors should understand.
The black swan approach—buying deep out-of-the-money options to profit from rare market crashes—sounds compelling in theory. In practice, however, this strategy confronts mathematical realities that may leave investors stranded between market cycles.
Moreover, when a “black swan” event occurs, monetizing the strategy can be difficult. In the heat of the moment, a black swan manager may get greedy, double down at the wrong time, and throw away previous paper gains.
The Waiting Game Problem
Black swan strategies are designed to capture profits during market disruptions that occur roughly every 7-10 years. This creates an inherent timing mismatch: investors need returns more frequently than markets provide black swan events.
Scale and Capacity Constraints
Even if the strategy works perfectly on paper, real-world implementation faces critical limitations:
Market Capacity: The options markets can only absorb limited amounts of deep out-of-the-money put buying before pricing becomes prohibitive.
Counterparty Risk: Large notional positions require reliable counterparties who remain solvent during the very crises the strategy aims to profit from.
Rate of Return Reality
II a black swan fund maintains modest positive returns (perhaps 2% from options costs offset by Treasury bill rates) for seven years waiting for the next crisis, it needs needs windfall gains just to achieve meaningful outperformance. The recent performance claims suggest actual returns fell far short of this requirement.
The Empirica Kurtosis Track Record
To understand the real-world performance of black swan strategies, I examined Taleb’s previous fund, Empirica Kurtosis Ltd. The Wall Street Journal reported the following performance:
Year-by-Year Performance:
2000: +60% return
2001: Losses (during 9/11 – the “mother of all black swans”)
2002: Continued losses
2003: Low single-digit gains (vs. 20% hedge fund average)
2004: Low single-digit gains (vs. 9% hedge fund average)
Fund Wind-Up: Assets under management peaked around $375 million before most assets were returned to investors and the fund was voluntarily wound up in 2004/2005. When I contacted Taleb for clarification on these figures, he did not respond—a pattern consistent with his evasive replies regarding the 2009 $20 billion performance claims. I do not know whether there were any inaccuracies in a Wall Street Journal article about the above performance of his previous black swan fund, Empirica Kurtosis Ltd.
The 9/11 Paradox: When Black Swan Funds Don’t Pay
The most revealing aspect of Empirica Kurtosis’s track record is its reported losses in 2001—the very year Taleb later characterized the 9/11 attacks as a quintessential “black swan” event.
This raises a fundamental question: How can a black swan fund lose money when the black swan finally appears?
Several factors could explain this paradox:
Timing Mismatches: Black swan events unfold over weeks or months. A fund might profit initially but give back gains through poor exit timing or pressure to maintain “insurance” positions when volatility is expensive.
Imagine a scenario: During the crisis, investors panic. The fund manager wants to cash in gains when volatility soars. But nervous investors want the manager to buy more “insurance,” when it is expensive and ill-considered. Managers who cave to this pressure cannot blame investors for a black swan fund’s anemic performance any more than a pilot can blame nervous passengers for a bumpy plane ride. Fund managers takes credit—and juicy fees—for the gains, so the must take responsibility for overall performance.
Implementation Challenges: Theory assumes perfect execution, but reality includes slippage, counterparty issues, and the psychological pressure of managing money during genuine crises.
Strategy Drift: The pursuit of steady returns between crises may lead to positions that work against the core black swan thesis when extreme events actually occur.
Winners’ Swan Dive
Big wins and big losses always occur after any market move. Winners are eager to claim they were smart—not lucky.
The big picture should be big enough to provide perspective. A black swan fund may have a good year followed by losses and mediocre returns. Empirica Kurtosis Limited may have become an example of a black swan fund with clipped wings.
The Predictability Paradox
Some events truly are unpredictable—like the fall of the Berlin Wall, which caught even intelligence agencies by surprise. But Taleb’s characterization of 9/11 as unpredictable ignores the August 2001 presidential briefing: “Bin Laden Determined To Strike in U.S.”
This raises a key question for black swan investors: if some “black swan” events actually have warning signs that skilled analysts can detect, should fund managers be focusing on analysis rather than just buying expensive options?
High-Probability Opportunities v Low-Probability Black Swans
In finance, analysis can often reveal huge problems on the horizon. After the 2008 financial crisis, Taleb claimed that it was a black swan, or a grey swan. It was hard to keep up with his rhetoric. But the reality was that several short sellers performed analysis on risky tranches of collateralized debt obligations, and knew they were built to fail. When fraud-riddled bonds come to market at par, their prices has only one way to go: down. This was no “mass delusion” as Michael Lewis claimed; it was fraud.
The hundreds of billions of such structured products destabilized the financial system. I was among the analysts who saw the problem and warned about it in advance. Hedge fund managers including Michael Burry (Scion), Bill Ackman (Pershing Square), and James Melcher (Balestra) saw the problem, too, and used credit derivatives to short indexes that referenced these fraud-riddled, overrated securities and the gond insurers that were over exposed to them.
“It was a dark market. I was onto WorldCom pretty early, and they went from investment grade to bankrupt overnight. I wondered why I didn’t make more money on this. It hit me that’s the way to short companies, and I noted there was a lot of these highly rated super leveraged companies where you could buy credit default swaps … and so I bought books: Janet Tavakoli’s 1998 book and that was the first book I read. I didn’t take all those equations and apply them, but I got the basics of the market from that.”
Michael Burry, interview by Financial Crisis Inquiry Commission staff, May 18, 2010, audio recording, timestamps 1:36:20-1:38:40, Financial Crisis Inquiry Commission Archive.
The lesson for investors is clear: rigorous analysis often beats expensive insurance when navigating financial crises.
About the Author
Janet Tavakoli is the president of Tavakoli Structured Finance founded in 2003. She is a globally recognized structured finance expert and derivatives authority who has advised financial regulators, testified as an expert witness in major financial litigation, and authored definitive works on credit derivatives and securitization.
For comprehensive analysis of structured finance products and securitization strategies, consult Tavakoli Structured Finance.
Related Articles
Reports of Huge Gains in Nassim Taleb’s Fund are False
Michael Lewis vs Wall Street Reality: Expert Analysis
Bill Ackman and the MBIA Confidence Game: A Big Short
MBIA and Ambac Face Massive Downgrades: Monoline Crisis
