‘Black Swan’ Funds Allow Investors to Speculate on Financial End Times

Black Swan hedge funds, named for a book by Nassim Nicholas Taleb, spookily made gains in May.

The particular type of hedge fund has been gaining in prominence thanks to the unrest in Greece, a debt crisis in Europe and what seems to investors to be a steady stream of environmental calamities. One hedge fund exec spoke to the New York Times about the attraction of the funds for investors:

“Clients are suddenly realizing the world isn’t as rosy as it’s been,” said Ahmed Fattouh, a hedge fund executive. “It makes a lot of sense to have these tail protections on.”

That is, protections against what Wall Street calls “tail risk” — a disaster that is estimated to have less than half a percent chance of happening.

The Times likens the funds to insurance, kind of a scary implication when you think about the more recent financial meltdowns we’ve seen. A trader who weathered the crisis spoke to the paper about the draw of Black Swan hedge funds:

Boaz Weinstein, a former trader at Deutsche Bank who lost more than $1 billion of the bank’s money during the financial crisis, began raising money for his own Armageddon fund late last year. It has since grown to $400 million of mostly institutional money, part of the $3.3 billion he has raised for his hedge funds.

“Some investors after nursing those losses say, ‘I’d be much happier in return for not having that kind of downside to reinvest 1 percent of my portfolio in tail hedging,’ ” he said.

Other execs feel the Black Swan funds are a “Wall Street fad” and one opines:

“I kind of believe that the best way to reduce risk is to take things out of the portfolio, not add them,” said Ken Grant, president and founder of Risk Resources.

Would you bet on tail risk or financial armageddon? Are Black Swan funds attractive to you?