Taleb Distribution

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The Taleb Distribution is a term used in economics to describe 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. 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.^[1] 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.