Nassim Taleb is all over the news today, for a couple of reasons, both of which seem to have caused quite a lot of misunderstanding. So after talking to him this morning, it’s worth clearing a few things up.
Firstly, the new fund being launched with his imprimatur, the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea.
Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another. Or, as Baruch condenses it, “when you shake the ketchup bottle, none’ll come; then the lot’ll”.
Then there’s the mini-brouhaha over a GQ article on Taleb by novelist and professional provocateur Will Self. This is British GQ, mind — it doesn’t go through the kind of fact-checking process that the US edition does. And Will Self, for all his erudition, is no finance geek; he prefers purple prose like this.
The streets surrounding the Taleb household were piled high with swept-up leaves the colour of money. Taleb picked me up from the station driving a boat-like Lexus with cream upholstery. “It’s eight years old!” he expostulated as he yawed this way and that through the sleepy sun-dappled Saturday streets, one hand clutching a BlackBerry against the steering wheel. He was keen to stress that he himself only retained a percentage of the half-billion dollars the Black Swan hedge fund he set up condensed from the toxic red cloud.
At one point in the article, Taleb is quoted talking about his hedge fund, and how “we made $20 billion for our clients”. Did he actually say this? He says that he didn’t, and that in fact he told Will Self in as many words that he was being misquoted and that the numbers were wrong. I believe Nassim on this, as someone who has talked to him quite a lot: he simply doesn’t give journalists performance numbers for his hedge funds. He doesn’t do that for people like me, who would understand what he was talking about; he certainly wouldn’t do it for someone like Will Self. If the $20 billion number ever did come up, says Taleb, it was probably as a very vague ballpark figure for the total notional amount associated with the options bought by his fund.
So Tracy Alloway is right: this episode might make GQ look bad, but it doesn’t really say anything about Taleb. And indeed the whole controversy seems to have been blown up as a result of a missive from Janet Tavakoli, where she says, quite rightly, that “any claim of enormous gains for any strategy—including a black swan fund— should be explained and balanced with caveats”. This is true, but it rather misses the point of the GQ profile, which is all about Taleb the man and which only incidentally touches on his investment returns.
Taleb is, as ever, annoyed that people are looking at things like GQ errors rather than at his bigger philosophical points — and of course now I’m doing much the same thing, although I am planning to write something big on risk which will touch on many of his ideas.
One of Nassim’s peculiar strengths is the way in which he refuses to get bogged down in details. If you ask him a specific question, you’re likely to get a very generalized answer. That can be frustrating, until you get used to it, and it explains a lot of the talking-past-each-other nature of the gripes he has with people like Tavakoli or Bookstaber or Merton. They tend to try to reduce things to something tractable; his whole point is that doing so misses the big picture. What he wants is a debate about his ideas; what he gets is a debate about his returns. But that’s probably inevitable in a world where facts are king — even when those facts can obscure more than they reveal.