Whose Betting Against Doomsday?

The headline on CNN Money this morning is “Doomsday investors betting on market crash.”

Nassim Taleb, the author of  the book The Black Swan, is an advisor to a hedge fund firm, Universa Investments, that takes investment positions that will make a lot of money if there is a steep market crash. Apparently the fund has attracted a lot of money recently.

Who’s on the other side of doomsday?

First, keep in mind that this doesn’t mean the hedge fund’s strategy has changed. Universa Investments always bets on a market crash. This just means that more investors have recently given the firm money to manage.

Apparently Universa does a lot of trading with the Mythical Investment Nebula. You see, this hedge fund can make bets that the market will crash without having to find a trading counter-party that has an opposite opinion. A disembodied Nebula will take the risk of the other side of the trade.

Oh, wait! I don’t mean that. That is actually nonsense. What I meant to say is that this must mean there is an exactly equal amount of money that is taking a bet that the market won’t crash. There has to be someone on the other side of the trade to make that bet. Who is it? Goldman Sachs? Other hedge funds? Warren Buffett himself? Dumb individual investors? Smart individual investors? All of the above?

Aside from my general point that we don’t know where the market will go, I continue to try to draw attention to misleading headlines from the financial media. These “doomsday” investors aren’t trading with a Nebula. There are other traders out there, possibly very smart ones, taking the other side of this bet. The headline could have just as easily been, “Investors piling into bets that the market will hold steady.”

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