Taleb Distribution

The Taleb Distribution is a term used in the financial markets to describe a situation of moral hazard on the part of hedge fund managers and bankers. It corresponds to a situation in which there is a high probability of a low gain and a small probability of a very large loss, where the expected value is less than zero, but is camouflaged by the appearance of low risk, steady returns. The fund manager ends up enriching himself in the long run because he does not pay for his losses. It is named after Nassim Taleb based on some of the ideas outlined in his book, Fooled by Randomness.

Some critics of the hedge fund industry claim that they generate high fees for investment strategies that follow a Taleb Distribution. [Are hedge funds a scam? "Naked Capitalism/Financial Time" [http://www.nakedcapitalism.com/2008/03/are-hedge-funds-scam.html] ] In such a scenario, the fund can claim high asset management and performance fees until they suddenly 'blow up', losing the investor significant sums of money and wiping out all the gains generated in previous periods; however, the fund managers keep all fees earned prior to the losses being incurred.

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