"After a decade-long bear market and two years of turmoil that saw the stock market plunge by 57%, investors are betting on still more financial pain in the months ahead. Bond yields are near record lows. Gold continues to soar. And stocks are whipsawing as traders try to predict the direction of an economy that remains, in the words of Federal Reserve Chairman Ben Bernanke, 'unusually uncertain.' But not every investor is trembling with anxiety over the next financial blowup. Some are embracing the market's volatility—and constructing portfolios to profit from it. A growing number of money managers and financial firms are rolling out investment products designed to exploit big declines known as 'black swan' events. Most of the products are geared toward institutional investors such as pension funds, endowments and high-net-worth families—but black-swan strategies are trickling down to Main Street as well. The term black swan was popularized in a 2007 best-selling book by author and investor Nassim Nicholas Taleb. It derives from the ancient belief, once widespread in the West, that all swans are white—a notion that was proven false when European explorers discovered black swans in Australia. The gist: Anything is possible. In fact, big surprises are more common than people think. In financial terms, a black swan usually results in drastic moves in the market—events such as the 1990 Iraqi invasion of Kuwait, the Sept. 11, 2001, terrorist attacks and the recent financial crisis. Statisticians call these events 'fat tails' (because they occur on the fringes, or tails, of a bell curve), while professional investors try to manage their 'tail risk.' The basic idea behind Mr. Taleb's black-swan strategy is to keep most of your money ultrasafe, and to bet a small portion—say 10%—on options contracts or other speculative bets whose prices will soar during a market panic."
"'The Black Swan' continues to be a hot 'buzzword' for the unpredictable rogue wave lurking out in the future."Random Roving, May 18, 2009