Black Swan

A Black Swan refers to an event that is highly unpredictable and unusual, typically having serious consequences on the economy and society. The name "Black Swan" comes from the fact that before the discovery of the black swan in Australia, all Europeans believed that swans were white.
The Black Swan phenomenon has three characteristics: unpredictability, massive impact, and explainability after the fact. The underlying logic is that the things we do not know are more significant than the things we do know, because many Black Swan events happen and escalate under unpredictable conditions.
Human society is primarily driven by extreme, unknown, highly improbable (based on our current knowledge) events with significant impacts, such as World War II, 9/11, and the COVID-19 pandemic. This means that human history does not progress in a slow, linear fashion, but instead jumps from one discontinuity to another. However, in reality, almost all studies of social life focus on what is known and repeatedly occurs, especially using the "bell curve" inference method, which underestimates the role of unpredictable random events in history, leading to the neglect of the truth.
In the capital markets, Long-Term Capital Management, which followed a normal distribution mathematical model, went bankrupt and liquidated in 2000; after the pandemic broke out in early 2020, leading hedge fund companies worldwide suffered huge losses, with Bridgewater, the top hedge fund, losing 23% in the first quarter of 2020. These examples show how mainstream investment institutions' seemingly complex quantitative models fail when Black Swan events occur.
So, how should investment institutions respond to Black Swan events? The answer is to adopt a "convexity" portfolio, where 85%-90% of the funds are allocated to zero-risk assets, such as government bonds, and the remaining funds are used to bet on various Black Swan events. The Black Swan fund Universa Investments, which adopted this portfolio strategy, earned 115% in 2008 and nearly 40 times the return in the first quarter of 2020.