Unfair Treatment of Black Swans

Post date: Jul 16, 2011 8:32:28 PM

Apocalypse Investors: How Wall Street Bets on Catastrophic Breakdowns That Destroy Lives?

"Bankers figure that if global markets collapse, they might as well make money out of it" by Alyssa Battistoni via Alternet.Org, July 14, 2011:

"In the aftermath of the financial collapse... the hedge fund managers and investment bankers largely reclaimed their bonuses and prestige...they’ve managed to do schadenfreude better; instead of deriving mere pleasure at the misfortune of others, they’ve figured out how to make money off it.

Azaz Ahmed in the New York Times, writes 'so-called black swan funds offer a way to profit in the event of a market collapse.'

They may be called black swans, but they operate more like vultures, hungrily eyeing the faltering economy and waiting to swoop in to tear what’s left to shreds. Along with tail risk funds, black swan funds offer a way for investors to insure themselves against losses—and make a bundle selling assets bought on the cheap—in the case of rare or unexpected catastrophes, from a default in Greece to an economic slowdown in China.

Are we okay with a system that deals with the risk of catastrophe by letting rich investors bet their way out of the consequences while everyone else gets screwed (again)? What we need isn’t more ways for reckless investors to protect themselves from the collapse of the system they’ve pushed to the brink; it’s structural reforms that reduce risk for everyone in the long run as well as the short term."

The preceding is an excerpt from Apocalypse by Alyssa Battistoni in Guernica Magazine (and cross-posted on AlterNet).

Definitions as provided by me

• • Black Swan: A rare and unexpected event

• Tail risk: Risk associated with a predictable but improbable event

  • Trader: Executes financial transactions.

  • Proprietary trader: Buys and sell financial securities for profit.

  • Investor: Analyzes and invests in short and long term financial securities, real-estate and other assets, to achieve growth, income or preservation of capital.

My comment as yet unpublished by the site moderator

Here are some important details that you haven't mentioned: These "Black Swan" and tail-risk hedge funds are proving to be rather unprofitable. Second, "Black Swan" and tail-risk funds are sold only to institutional and high net-worth investors. So that means that institutional and high net-worth investors are NOT excessively profiting, nor even breaking even, by investing in tail-risk funds. In other words, they are NOT raking in money, feeding carrion-like off the misfortunes of others, and of extreme market events. I should provide a URL for evidence of factual validity, but lots of sites flag comments with active links as spam (not accusing you of such, but haven't tested here, the folks at Alternet don't do that).

To my surprise, and delight, I noticed that common stocks of basic "goods and services" companies have had much better returns recently than exotics like Black Swan/ long-tail hedge funds. For example, General Electric, Google, Apple, Paychex and IBM are doing great! They are big manufacturing and technology companies, with lots of employees. They sell lots of useful products to consumers and B2B customers. They are public companies, i.e. with U.S. exchange-listed common stock available to one and all. That means there are no restrictions on who can benefit from the returns, unlike Rule 144a, qualified investor status (high net-worth or minimum investment of $1 million) and other requirements to invest in hedge funds, Black Swan or otherwise. (Or Facebook IPO shares, for that matter). Don't vilify an entire market economy because of the immorality of a subset.

You weaken your premise, that financial market corruption begets further exploitation, by using this topic as an example and by not doing more research. After all, the driver for the insurance industry is our fear of death and disaster. This is particularly scrutinized for life insurance companies that re-sell individual policies to investors (viaticals). But neither is immoral if run ethically and legally.

Your last sentence is the take-away. Though not well-supported, it is true.

What we need isn't more ways for reckless investors to protect themselves from the collapse of the system they’ve pushed to the brink;it’s structural reforms that reduce risk for everyone in the long run as well as the short term

So how to go about enacting that kind of change, particularly in the short-term? I don't know the answer to that.