Universa tail fund returned 3,600% in March(bloomberg.com)
bloomberg.com
Universa tail fund returned 3,600% in March
https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-tail-risk-fund-returned-3-600-in-march
135 comments
In layman's terms, it's like saying when your life insurance pays out $1M you have a 2500000% return on that month's $40 payment. It's not wrong, but if that's the only number you look at you'll always conclude that buying insurance is the road to riches.
Exactly
My impression is Universa is in effect, a product that aggregates intelligent short positions based on their assessment of tail risks, which other mainstream managers use as a hedging instrument. Their %3.5 management fee is a multiple of the 1:10 that other funds have been forced to take, and almost double the 2:20 model of pre-08 hedge funds.
Speculating, but the kind of fund I would imagine buys their product would be in the 5bn+ AUM range, who has broad exposure to a bunch of mark-to-unicorn venture backed startups in their book.
It'd be like %2 Universa, %60 index funds, and %20 buying sand hill dead dogs and F rounds as the price of admission for participation in their next fresh funds, %10 unicorn, %4 on something socially earnest and backed by someone politically connected for social climbing, a management fee, and spoilage. How close is that?
Universa being the tool that offsets the tide rolling out on those other bets.
Speculating, but the kind of fund I would imagine buys their product would be in the 5bn+ AUM range, who has broad exposure to a bunch of mark-to-unicorn venture backed startups in their book.
It'd be like %2 Universa, %60 index funds, and %20 buying sand hill dead dogs and F rounds as the price of admission for participation in their next fresh funds, %10 unicorn, %4 on something socially earnest and backed by someone politically connected for social climbing, a management fee, and spoilage. How close is that?
Universa being the tool that offsets the tide rolling out on those other bets.
This is almost exactly correct. Though what's crazy is they charge fees on the notional - aka the amount they're "insuring".
So if you have a 4b portfolio, they're charging fees on the 4b.
So if you have a 4b portfolio, they're charging fees on the 4b.
Private equity does it. Why not these guys?
But seriously, not charging SOME sort of fee on capital that is likely to be uninvested on a short-term horizon is giving investors a pretty valuable free option. I'm assuming they have a flexible mandate and are able to invest more given some sort of market conditions. Gauging that capacity and properly modeling trade sizes is extremely important for a strategy like this and is not free.
But seriously, not charging SOME sort of fee on capital that is likely to be uninvested on a short-term horizon is giving investors a pretty valuable free option. I'm assuming they have a flexible mandate and are able to invest more given some sort of market conditions. Gauging that capacity and properly modeling trade sizes is extremely important for a strategy like this and is not free.
It's more a way to drive a point home. Taleb has been shouting this point for more then a decade. A portfolio without insurance is no portfolio. His arguing is that institutions that are to big too fail hardly ever insure themselves in this way, using optimistic lineair growth models without hedging themselves against extreme and unpredictable risk. And then when they go bankrupt they present the bill to the tax payer.
It seems necessary to make a point here since these models haven't changed for decades even though they have clearly failed many times.
It seems necessary to make a point here since these models haven't changed for decades even though they have clearly failed many times.
> And then when they go bankrupt they present the bill to the tax payer.
... and get bailed out - which means that they are using a perfectly rational and profitable investment.
> these models haven't changed for decades even though they have clearly failed many times.
They may have failed you and the economy at large, but with very few exceptions (e.g. Lehman), they have not failed the people who are running them, which is why they keep using them.
... and get bailed out - which means that they are using a perfectly rational and profitable investment.
> these models haven't changed for decades even though they have clearly failed many times.
They may have failed you and the economy at large, but with very few exceptions (e.g. Lehman), they have not failed the people who are running them, which is why they keep using them.
Yes sort of. This is the obvious that bothers many.
Of course there is also a deeper culture here. For instance that students in big name universities learn standard macro economics. And then when they come to the institutions this is their default mode of thinking, even though they don't directly benefit from this. But it might be hard to reach to top of many of these institutions as a contrarian, so longterm there is not much incentive to go against established norms.
Of course there is also a deeper culture here. For instance that students in big name universities learn standard macro economics. And then when they come to the institutions this is their default mode of thinking, even though they don't directly benefit from this. But it might be hard to reach to top of many of these institutions as a contrarian, so longterm there is not much incentive to go against established norms.
[deleted]
That sounds very misleading, not just sort of.
isn’t that like saying my $1 billion portfolio had a 3600% return because I invested $100 on a penny stock that went up 3600% and the rest of it was in cash.
isn’t that like saying my $1 billion portfolio had a 3600% return because I invested $100 on a penny stock that went up 3600% and the rest of it was in cash.
Especially if they are buying puts on a regular basis and then cherry picking one particular period that paid off well.
It's like randomly picking a penny stock each year and then suddenly it's up 3600%. That's not some investing magic, it's just you doing the same thing and suddenly being right.
It's like randomly picking a penny stock each year and then suddenly it's up 3600%. That's not some investing magic, it's just you doing the same thing and suddenly being right.
> it's just you doing the same thing and suddenly being right.
That's the whole premise, that inevitably they will be right.
That's the whole premise, that inevitably they will be right.
So we're talking about a big return on ... a small piece of their portfolio?
That seems very, selective.
That seems very, selective.
The hedge fund in question DID provide those returns. The portfolio given at the end was an example of how you use the hedge fund as essentially a financial product for a larger portfolio.
% returns are usually quoted vs AUM; not invested capital.
That's not what the article says, though. Spitznagel said his clients had a return of 4144% year to date. He refers to the fund not positions. Knowing Spitznagel he isn't prone to pulling an "Ackman". He doesn't need to.
So in a way this also only works when there are few people following the strategy, right? Not everyone can have puts on the same thing as someone had to be on the other end of the deal.
very misleading and after taxes it is probably less
i would not be surprised if it much worse. if they truly had a good strategy why tell everyone?
i would not be surprised if it much worse. if they truly had a good strategy why tell everyone?
For more investor funds. Also, his style of investing is supposed to make a killing during times like this- but when you are flat to down a few percent for all the boring years in between black swan events, things don't look great.
There is also ego and prestige, and Taleb seems to desire both to a great degree.
There is also ego and prestige, and Taleb seems to desire both to a great degree.
The problem is not Taleb's trading method, it would provide a great return if the US had free markets...what the fed is currently doing is more akin to communism, bailing out and buying up all the essential industries.
While I agree that the Fed may be overplaying their hand, I disagree that Taleb has an otherwise outperforming strategy. The cost of hedging against black swan events is not zero, and has increased substantially since the financial crisis- at least in part by his own work to increase awareness of them! Volatility used to be greatly underpriced by the market, and while that may still be true, its not nearly true to the extent it was pre-crisis.
We are not out of the crisis yet. Taleb has been banging this drum for decades, and profited handsomely in 2008, and IIRC also in 2001 and 1998. His lesson was not appreciated by the industry at large during those decades - and it is likely that a couple of years after the end of this crisis (whenever that may be, anywhere from a few month to over a decade), hedging black swans will be cheap again.
Their business model is investing on behalf of their clients as a hedge against tail risk. They need people to know about their success in order to remain in business. They've been going strong for at least 12 years.
12 years is not even a full market cycle. How about 30 years. this method would have done very badly from 2000-2008 due to lack of sudden crashes combined with weak market performance. This incurs losses on both the equity part and the hedge.
It would have done fantastic in that timespan!
Remember, the dotcom crash had huge drops across almost all of the tech sector for a few years straight.
Plus, 9/11 happened in that time frame and took out travel stocks.
It is those huge drops that Universa counts on.
So he would had done well - probably on the level of a Bobby Axelrod (yes, I know Bobby is fictional, but he's a great composite character of raw trading instinct based on his 9/11 trades).
Remember, the dotcom crash had huge drops across almost all of the tech sector for a few years straight.
Plus, 9/11 happened in that time frame and took out travel stocks.
It is those huge drops that Universa counts on.
So he would had done well - probably on the level of a Bobby Axelrod (yes, I know Bobby is fictional, but he's a great composite character of raw trading instinct based on his 9/11 trades).
Taleb and Spitznagel have been investing based on this philosophy since 1999. The huge gains Taleb made in the 2007-2008 crisis are what made him famous and forced people to take his ideas seariously.
They can only report results on the period of time they've been in business, but so far their strategy seems to have held up for about 15-20 years.
They seem to know what they're doing, and given the stakes, have likely thought about any pitfalls you or I could imagine, along with many others we couldn't imagine.
References:
https://en.wikipedia.org/wiki/Mark_Spitznagel
https://www.wsj.com/articles/triumph-of-the-market-pessimist...
https://www.zerohedge.com/news/2018-09-22/how-fund-betting-e...
They can only report results on the period of time they've been in business, but so far their strategy seems to have held up for about 15-20 years.
They seem to know what they're doing, and given the stakes, have likely thought about any pitfalls you or I could imagine, along with many others we couldn't imagine.
References:
https://en.wikipedia.org/wiki/Mark_Spitznagel
https://www.wsj.com/articles/triumph-of-the-market-pessimist...
https://www.zerohedge.com/news/2018-09-22/how-fund-betting-e...
That's true. I wonder if the actual objective is insurance. In the good times you lose out. But you don't mind because it's insurance against bigger losses when things go south. As an example it is reported that the organisers of the Wimbledon tennis tournament have spent 34million on insurance premiums over a period of time. Due to covid-19 they are cancelling the tournament and getting a payout of 100million+. Probably not priced correctly but you get the point. In the good years they're hemorrhaging money...
Yes, it’s an insurance policy, not a standalone investment strategy.
Because it's boring and takes a long, unpredictable amount of time to return.
They guy has written 5 books about exactly what he does.
It's not a secret.
Even the Medallion fund doesn't do anything secret, they just win 50.7% of a lot of bets.
They guy has written 5 books about exactly what he does.
It's not a secret.
Even the Medallion fund doesn't do anything secret, they just win 50.7% of a lot of bets.
>Even the Medallion fund doesn't do anything secret, they just win 50.7% of a lot of bets.
lol no comparison between the two. Medallion has the strongest NDA in exsitance. After 30 years no one knows anything about it. Taleb writes books because more money in books than his method. Simons will never write a book about his method because his method actually works. It is possible that Taleb has a secret strategy but the method he is selling to the public is not going to make you rich, nor will it generate alpha.
lol no comparison between the two. Medallion has the strongest NDA in exsitance. After 30 years no one knows anything about it. Taleb writes books because more money in books than his method. Simons will never write a book about his method because his method actually works. It is possible that Taleb has a secret strategy but the method he is selling to the public is not going to make you rich, nor will it generate alpha.
Oh, so taleb is hedging his hedge fund by doing other revenue generating things?
Imagine that
Imagine that
[deleted]
A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volatility and risk. If you find ways to bet on this in a rigorous manner, the payoff is disproportionally larger. For the lay investor, the hard part is that this essentially means losing money 95% of the time [in those positions], something most people aren't comfortable with. That and some technical difficulties, like liquidity, etc.
Of course, the bets needs to be sized correctly. This is not something you'd put all your money into, and this is part of the design from the beginning. See Kelly Criterion https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-CRITE... for how these people think about it in a rigorous way.
For those who are interested to read more on how this is done, have a look at the papers here: https://www.universa.net/riskmitigation.html
Spitznagel has also written a book called Dao of Capital which talks about the logic and underlying philosopy of these ideas: https://www.amazon.com/Dao-Capital-Austrian-Investing-Distor...
There's also Dynamic Hedging by Taleb https://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Opti... which talks about these options and their structure in more technical manner, though I haven't read it.
Of course, the bets needs to be sized correctly. This is not something you'd put all your money into, and this is part of the design from the beginning. See Kelly Criterion https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-CRITE... for how these people think about it in a rigorous way.
For those who are interested to read more on how this is done, have a look at the papers here: https://www.universa.net/riskmitigation.html
Spitznagel has also written a book called Dao of Capital which talks about the logic and underlying philosopy of these ideas: https://www.amazon.com/Dao-Capital-Austrian-Investing-Distor...
There's also Dynamic Hedging by Taleb https://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Opti... which talks about these options and their structure in more technical manner, though I haven't read it.
> A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volatility and risk.
After the statistical basics (don't confuse power-law distributed phenomena for normally distributed phenomena), a lot of what Taleb seems to prescribe boils down to simple skepticism of modeling the real world with games, which he describes as the Ludic Fallacy [1]
https://en.wikipedia.org/wiki/Ludic_fallacy
The most entertaining narrative he conjures is the contrast between "Dr John", a mathematically oriented scientist, and "Fat Tony", a clever everyman, and how Dr John gets fooled about the odds of a game of coin-flip that has so far come up with 99 heads and no tails, asserting each flip must be IID at 50-50, but Fat Tony sees the reality: that the coin is rigged.
After the statistical basics (don't confuse power-law distributed phenomena for normally distributed phenomena), a lot of what Taleb seems to prescribe boils down to simple skepticism of modeling the real world with games, which he describes as the Ludic Fallacy [1]
https://en.wikipedia.org/wiki/Ludic_fallacy
The most entertaining narrative he conjures is the contrast between "Dr John", a mathematically oriented scientist, and "Fat Tony", a clever everyman, and how Dr John gets fooled about the odds of a game of coin-flip that has so far come up with 99 heads and no tails, asserting each flip must be IID at 50-50, but Fat Tony sees the reality: that the coin is rigged.
That rigged coin story is quite known, but Taleb’s account is most entertaining, https://mobile.twitter.com/fpoling/status/929410947713728513
You don't even have to be a genius -- everyone expected the market to collapse, ~10 years of a low not-QE-but-definitely-actually-QE federal funds rate means a lot of companies and banks with access to that credit were over extending themselves.
The financial system is cyclical -- funds like Berkshire Hathaway were starting to sit on more and more cash since last year. Even if you did nothing but follow their movements you would have been tipped off to the upcoming downturn. The consensus was that a crash was overdue, the question was just what was going to cause/trigger it.
Also, disregard when pundits, government figures and central bankers say that this crash happened to an economy that was "doing great just a few months ago" -- it's just like 2008, the problems were there, they were just uncovered by COVID-19. Years of cheap loans, lax regulation, and lack of financial prudence means over-leveraged companies were taking risks they shouldn't have been, and all it took was one or two months of projected lost revenues for liquidity to implode. We're not even talking about restaurants who might run super tight margins here, we're talking about huge banks, institutions and large companies. Take the airlines for example, years of record profit and a clear view of what 9-11/H1N1/Ebola did to travel, yet no rainy day fund.
And the risk COVID-19 caused was absolutely not unknown. We've had SARS, MERS, H1N1, Ebola all come through, businesses have had plenty of chances to consider insuring themselves or making themselves resilient -- there's just less and less incentive to be fiscally responsible with free-flowing credit.
The financial system is cyclical -- funds like Berkshire Hathaway were starting to sit on more and more cash since last year. Even if you did nothing but follow their movements you would have been tipped off to the upcoming downturn. The consensus was that a crash was overdue, the question was just what was going to cause/trigger it.
Also, disregard when pundits, government figures and central bankers say that this crash happened to an economy that was "doing great just a few months ago" -- it's just like 2008, the problems were there, they were just uncovered by COVID-19. Years of cheap loans, lax regulation, and lack of financial prudence means over-leveraged companies were taking risks they shouldn't have been, and all it took was one or two months of projected lost revenues for liquidity to implode. We're not even talking about restaurants who might run super tight margins here, we're talking about huge banks, institutions and large companies. Take the airlines for example, years of record profit and a clear view of what 9-11/H1N1/Ebola did to travel, yet no rainy day fund.
And the risk COVID-19 caused was absolutely not unknown. We've had SARS, MERS, H1N1, Ebola all come through, businesses have had plenty of chances to consider insuring themselves or making themselves resilient -- there's just less and less incentive to be fiscally responsible with free-flowing credit.
As Taleb has said many times: Don't tell me your predictions, show me your portfolio.
What did you do with this "obvious" information?
Did you go all in beforehand to make a killing and set yourself up for life? Did you make smaller bets and build an awesome rainy day fund? Did you sit on the sidelines and call the plays afterwards?
What did you do with this "obvious" information?
Did you go all in beforehand to make a killing and set yourself up for life? Did you make smaller bets and build an awesome rainy day fund? Did you sit on the sidelines and call the plays afterwards?
The beautiful thing about trading is that you're either right or you're wrong. It's unforgiving in a way that punditry isn't. When you trade you have skin in the game, since past failures leave a permanent record on your portfolio, and people quickly learn that overconfidence is a liability.
The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now.
Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise.
Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise.
Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
> The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now.
Have you followed what the federal reserve has been doing in the last few months?
- 1% federal rate cut (the maximum cut during 2008 was 0.5%) - UNLIMITED QE (this has never happened before) - Purchasing of fallen angels (companies which recently had bonds downgraded to junk) - Purchasing junk bond ETFs
Also, have you been following the amount of downgrades on corporate debt? Did you know that the airlines that are now asking for bailouts did leveraged (IIRC) stock buybacks with most their profits over the last decade? Buybacks are similar to dividends, but doing them with borrowed money or without sound cash reserves is fiscally irresponsible.
It is a fact that companies and banks were extending themselves, the proof is in the evaporation of bond yields and the collapse of the credit market, which is what the fed is responding to.
Despite all this, there are banks that are seeing 45%+ profit losses -- JPM is one of the biggest (definitely too-big-to-fail) banks and saw a 69% profit loss.
> Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise.
What are you talking about? I don't think I understand this argument, are you implying that real wages have grown significantly enough to protect the regular house hold? I can't read this any other way so I'll assume you are, and leave you some numbers on inflation-adjusted hourly wage growth versus productivity growth[1]. Real wage growth has not grown enough to keep families afloat, otherwise we wouldn't need helicopter money[2] except for the most fiscally irresponsible households.
> Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
Commercial aviation accounts for 5% of the US's GDP[3]. This is not a small amount.
[0]: https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnin...
[1]: https://www.epi.org/productivity-pay-gap/
[2]: https://en.wikipedia.org/wiki/Helicopter_money
[3]: https://www.airlines.org/data/
Have you followed what the federal reserve has been doing in the last few months?
- 1% federal rate cut (the maximum cut during 2008 was 0.5%) - UNLIMITED QE (this has never happened before) - Purchasing of fallen angels (companies which recently had bonds downgraded to junk) - Purchasing junk bond ETFs
Also, have you been following the amount of downgrades on corporate debt? Did you know that the airlines that are now asking for bailouts did leveraged (IIRC) stock buybacks with most their profits over the last decade? Buybacks are similar to dividends, but doing them with borrowed money or without sound cash reserves is fiscally irresponsible.
It is a fact that companies and banks were extending themselves, the proof is in the evaporation of bond yields and the collapse of the credit market, which is what the fed is responding to.
Despite all this, there are banks that are seeing 45%+ profit losses -- JPM is one of the biggest (definitely too-big-to-fail) banks and saw a 69% profit loss.
> Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise.
What are you talking about? I don't think I understand this argument, are you implying that real wages have grown significantly enough to protect the regular house hold? I can't read this any other way so I'll assume you are, and leave you some numbers on inflation-adjusted hourly wage growth versus productivity growth[1]. Real wage growth has not grown enough to keep families afloat, otherwise we wouldn't need helicopter money[2] except for the most fiscally irresponsible households.
> Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
Commercial aviation accounts for 5% of the US's GDP[3]. This is not a small amount.
[0]: https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnin...
[1]: https://www.epi.org/productivity-pay-gap/
[2]: https://en.wikipedia.org/wiki/Helicopter_money
[3]: https://www.airlines.org/data/
The proof is in the fact that a once in 100 year event has caused some stress? Of course it has!
"are you implying that real wages have grown significantly enough to protect the regular house hold?"
The alternative appears at this point to have been contraction.. so growth is better than contraction! I agree that it is not enough, but wage stagnation only started to finally reverse course after years of low rates.
Citing "profit loss" is beyond parody, profit loss! Not even citing actual losses! Like, they are still profitable? ROTFL!
5% is a small amount, and it is not as if there is a scenario where air travel is a robust business right now! There are not, at this point, widespread bankruptcies of large companies. I rest my case.
"are you implying that real wages have grown significantly enough to protect the regular house hold?"
The alternative appears at this point to have been contraction.. so growth is better than contraction! I agree that it is not enough, but wage stagnation only started to finally reverse course after years of low rates.
Citing "profit loss" is beyond parody, profit loss! Not even citing actual losses! Like, they are still profitable? ROTFL!
5% is a small amount, and it is not as if there is a scenario where air travel is a robust business right now! There are not, at this point, widespread bankruptcies of large companies. I rest my case.
This method is highly path dependent and needs low volatility to work. It requires that the market not just fall, but rather fall suddenly. And it req. a vix be around 15 or so. The tail method would have failed from 2000-2008, which was a period of weak stock market returns but no sudden drops like in 2008 or 2020. The tail fund needs a very sudden drop to make those huge returns but also very low volatility proceeding the drop. The market falling 20% over a 1-year period like in 2000,2001, and 2002 would incur both losses for the tail part and losses for the equity part, versus a 20% decline in a month. From 1997-2003 volatility was quite high so the method would have done badly too. It would have done badly from 2003-2008 due to losses from the hedge.
http://greyenlightenment.com/does-tail-hedging-work-it-depen...
The tail hedge method loses 10% a year from option decay assuming that 1% of the portfolio is invested in such options and the rest in stocks. That is very substantial over the long term if there are no sudden crashes.
If something sounds too good to be true, it probably is.
http://greyenlightenment.com/does-tail-hedging-work-it-depen...
The tail hedge method loses 10% a year from option decay assuming that 1% of the portfolio is invested in such options and the rest in stocks. That is very substantial over the long term if there are no sudden crashes.
If something sounds too good to be true, it probably is.
But there are always sudden drops eventually.
Market crashes aren't "if" they're "when"
People made huge money in '08 because they were betting the fail side of the CDOs. Small bleed for years, big win in '08
Market crashes aren't "if" they're "when"
People made huge money in '08 because they were betting the fail side of the CDOs. Small bleed for years, big win in '08
If your burn rate is 10% per year, the “when” is what matters.
True, but figuring out how much of your bankroll you need to invest in a fund like this to properly hedge (that's why it's called a hedge fund) against catastrophic loss in your other investment is the balance you need to strike.
For the people commenting that this wouldn't work over the long run (or the past ~10 years of the bull market), the article says this:
> Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.
So, yes this shouldn't be 100% of your portfolio (same with any fund), but a similar strategy might be successful in a small % of your portfolio as a hedge.
> Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.
So, yes this shouldn't be 100% of your portfolio (same with any fund), but a similar strategy might be successful in a small % of your portfolio as a hedge.
That's interesting but those endpoints seem cherry-picked given the strategy.
Also cherrypicking the fund, it seems. I noted a few days ago a broader view: https://www.ft.com/content/602c45e1-219c-49b2-ab17-9b47791fd...
> Such funds on average lost money every year from 2012 to 2019 inclusive, according to CBOE Eurekahedge’s index of tail risk hedge funds. Despite having three crises to profit from since the start of 2008 — the global financial crisis, the eurozone debt crisis and the coronavirus crisis — they are still down by an average of 24 per cent over that period.
> Such funds on average lost money every year from 2012 to 2019 inclusive, according to CBOE Eurekahedge’s index of tail risk hedge funds. Despite having three crises to profit from since the start of 2008 — the global financial crisis, the eurozone debt crisis and the coronavirus crisis — they are still down by an average of 24 per cent over that period.
Yes. One-quarter of 3.3% of your portfolio would lose value during that period. That is the cost of the insurance that paid off when 96.7% of your portfolio would have lost over 12% of its value.
The hedge is not your primary investment. It is an insurance policy. Crashes happen several times over an investor’s lifetime.
The hedge is not your primary investment. It is an insurance policy. Crashes happen several times over an investor’s lifetime.
> The hedge is not your primary investment. It is an insurance policy. Crashes happen several times over an investor’s lifetime.
The more frequently they happen, the less valuable such insurance is, especially one that has such ruinously negative returns. (I'm not clear if that's -25% compared to a S&P benchmark or an absolute -25% in a period where the S&P is up like 200%+, but neither way is flattering).
Note, of course, that Taleb makes all of his money from books, and that the funds he actually ran all seem to have closed ignominiously and gone down the memory-hole - despite 'black swans' like 9/11...
The more frequently they happen, the less valuable such insurance is, especially one that has such ruinously negative returns. (I'm not clear if that's -25% compared to a S&P benchmark or an absolute -25% in a period where the S&P is up like 200%+, but neither way is flattering).
Note, of course, that Taleb makes all of his money from books, and that the funds he actually ran all seem to have closed ignominiously and gone down the memory-hole - despite 'black swans' like 9/11...
The article buried the news in exchange for a clickbait headline. The real news is this:
> The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.
So IMHO the insurance premium would have been worth it.
If you'd been paying this premium for 11 years and looking at it in late 2019 you might think otherwise. OTOH if you were the kind of person who'd buy this product in the first place, 2019 would definitely be the time you'd be sure to hang on to it!
> The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.
So IMHO the insurance premium would have been worth it.
If you'd been paying this premium for 11 years and looking at it in late 2019 you might think otherwise. OTOH if you were the kind of person who'd buy this product in the first place, 2019 would definitely be the time you'd be sure to hang on to it!
Yes, it is possible to set up a fund that is structured to produce strong returns during black-swan events.
But outside of black-swan events, you are going to lose money investing in such a fund. It is more like an insurance policy than a traditional investment.
Traditional investors might hold lots of equities during a bull market and fewer equities during a bear market. A fund like this allows you to maintain a more constant percentage of equities, with the understanding that you're spreading your losses over time, instead of incurring more significant losses during a sharp market downturn.
Similarly, you can make some excellent money in a 3x bear fund if your trades are fortuitously timed, since they aim to give you three times the amount their associated index loses in a day. But it is not a buy-and-hold investment. If you buy and hold, your money will eventually disappear.
But outside of black-swan events, you are going to lose money investing in such a fund. It is more like an insurance policy than a traditional investment.
Traditional investors might hold lots of equities during a bull market and fewer equities during a bear market. A fund like this allows you to maintain a more constant percentage of equities, with the understanding that you're spreading your losses over time, instead of incurring more significant losses during a sharp market downturn.
Similarly, you can make some excellent money in a 3x bear fund if your trades are fortuitously timed, since they aim to give you three times the amount their associated index loses in a day. But it is not a buy-and-hold investment. If you buy and hold, your money will eventually disappear.
I think the thesis of this type of trading is that black swan events are underestimated in the market, making far out-of-the-money options (i.e. insurance against unlikely events) sufficiently cheap that you can make money in the long run even if you lose money on 99.9% of days.
This is an extension of 'the market can remain irrational longer than you can remain liquid'. You could make money in the long run if you have the funds to get there. If we consider that this and the 2008 crisis were black swan events, then we could expect them to occur perhaps once a decade, which from now could be up to 20 years for the next one. By the end of that 20 year period the amount you have remaining to bet on the black swan event would be severely limited by the preceding 2 decades.
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If you aren’t leveraged, it’s trivial to ride out crashes. Why drag your returns down with expensive insurance?
Yes, Taleb's entire life work is premised on the fact that people's mental models of probability distributions are not fat-tailed enough to match reality. He believes that such strategies should be positive in expectation (aka, should make money over the long run).
The term I've heard used is Kurtosis Risk: https://en.wikipedia.org/wiki/Kurtosis_risk
I'd say it's even more basic than that. What I take from it is how to avoid ruin and potentially profit from the tail event. I don't see it as a means of increasing wealth even though it can have that effect. It's about preservation first and foremost.
“ Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index.”
The time period of March 2008 to March 2020 is cherry-picked. Yes, of course, the return is going to look impressive right after a black-swan event. That's why the fund exists. But in ordinary times, you're going to lose money. Which is not necessarily a bad thing, any more than it's a bad thing to "lose" money to a term life insurance policy but never pay out because you don't die.
A previous article on them stipulated that through December 2019 they were still up vs the market.
“After the March payday, its flagship Black Swan fund has produced a mean annual return on invested capital of 76%* since the firm was created in 2008. It’s a good result, but if you were going to make the same calculation as of Dec. 31 2019, the long-term compounded return would only be marginally better than that of the S&P 500 over the same time period.”
https://www.google.com/amp/s/www.forbes.com/sites/antoinegar...
“After the March payday, its flagship Black Swan fund has produced a mean annual return on invested capital of 76%* since the firm was created in 2008. It’s a good result, but if you were going to make the same calculation as of Dec. 31 2019, the long-term compounded return would only be marginally better than that of the S&P 500 over the same time period.”
https://www.google.com/amp/s/www.forbes.com/sites/antoinegar...
As a sibling commenter posted the fund actually presents itself as insurance - you don’t put all your money into it, you only put a small percentage. That percentage would indeed eventually disappear if you never refreshed it, but keeping a percentage in this “insurance” hedge would also mean you basically shrug off giant downturns like Covid.
Yes, I'm not disputing the article. I'm summarizing it and pointing out some caveats for people who aren't familiar with how this works.
The article addresses that point.
I'm getting really tired of these funds advertising these single event returns. Looking at their long term performance makes them look mediocre at best. There are seriously countless funds that have been betting on the next big disaster for the past 10 years and have been bleeding money out the nose and then they've made up a tiny fraction of their losses in the past month and are now like "Oh look we were right all along!"
agree. these hedge fund managers are just glorified salespeople. even ray dalio.
Dalio is a really good salesman though, have to give him credit.
As an NNT fan I knew about Universa long ago, and would have loved to have used it. Sadly however as a lowly "consumer" investor of normal means the minimum investment to gain access to funds of this kind is just astronomical. A serious tail risk hedge of NNT caliber that members of the unwashed like me could use would be a great thing.
And I lack the technical knowledge or patience to manually do all the necessary option trading to build this kind of tail risk hedge.
The Cambria Tail Risk ETF was my next option, and it did give some positive returns over the Coronavirus crash, but sadly nothing like 3600%, so it didn't do all that much good as a hedge. I assume this is because being an ETF it is liquid, and therefore the entire point of buying options ahead of time is defeated.
edit: grammar.
And I lack the technical knowledge or patience to manually do all the necessary option trading to build this kind of tail risk hedge.
The Cambria Tail Risk ETF was my next option, and it did give some positive returns over the Coronavirus crash, but sadly nothing like 3600%, so it didn't do all that much good as a hedge. I assume this is because being an ETF it is liquid, and therefore the entire point of buying options ahead of time is defeated.
edit: grammar.
Problem with Cambria's ETF is a majority of the fund is in treasuries, so convex exposure to volatility is dampened; the fund doesn't act as insurance.
Note that they are true hedge fund, that is their job is insurance, not investment per se.
That means their clients are likely heavily invested to other means, dedicating small percentage to Universa, which sums up to 0-1% of gain in total while all other assets are losing a lot.
I'd really like a better understanding about what these active long volatility funds do. It seems a lot more involved than just buying rolling out of the money puts, which sounds like it would be an expensive/inefficient insurance. Another fund example is Artemis Capital which have a number of papers I've read over the past month. [1]
[1] https://www.artemiscm.com/welcome#research
[1] https://www.artemiscm.com/welcome#research
Some of the things required to manage a tail risk fund are:
1. Finding mispriced way-out-of-the-money puts, probably a full-time job in and of itself and requiring savvy, if not also sophisticated, price models
2. The other half of the strategy is to mitigate the losses on the way OotM puts by simultaneously selling close-to-the-money and in-the-money options. I don’t recall the details but Taleb has mentioned this in the past. There’s a lot of work in designing, managing and executing those too.
1. Finding mispriced way-out-of-the-money puts, probably a full-time job in and of itself and requiring savvy, if not also sophisticated, price models
2. The other half of the strategy is to mitigate the losses on the way OotM puts by simultaneously selling close-to-the-money and in-the-money options. I don’t recall the details but Taleb has mentioned this in the past. There’s a lot of work in designing, managing and executing those too.
Anybody know what the minimum is to invest in this?
I emailed them a few months ago trying to invest, but they ignored me.
I realize it's going to be a large amount, but is it like $1M+, $10M+, $100M+, or something larger?
Also, is there a way to get in, indirectly? For instance, banks will pool smaller investors' money to get them into private equity. Is there a channel like that, to get into Universa?
I imagine I would have made a life-changing amount of money if if I had gotten into this fund when I attempted to. (Although my goal was to hedge, not to make money.)
Stupidly, I also followed the fund managers's advice (in their literature) of "don't try to do this yourself." In fact I could have done well buying put options.
I emailed them a few months ago trying to invest, but they ignored me.
I realize it's going to be a large amount, but is it like $1M+, $10M+, $100M+, or something larger?
Also, is there a way to get in, indirectly? For instance, banks will pool smaller investors' money to get them into private equity. Is there a channel like that, to get into Universa?
I imagine I would have made a life-changing amount of money if if I had gotten into this fund when I attempted to. (Although my goal was to hedge, not to make money.)
Stupidly, I also followed the fund managers's advice (in their literature) of "don't try to do this yourself." In fact I could have done well buying put options.
Why not just take your money and buy lottery tickets? None of their clients made this return on more than a tiny fraction of their portfolio, and odds are it won’t happen again for decades.
Please don't talk beyond your expertise.
Making this return on a tiny fraction of your portfolio is exactly what hedging is designed to do. The strategy worked as designed.
Please don't denigrate legitimate investors by equating them to lottery players.
I hesitate to say that much because you don't seem to care about actually understanding what you are talking about, anyway. I feel like I'm just feeding a troll.
Making this return on a tiny fraction of your portfolio is exactly what hedging is designed to do. The strategy worked as designed.
Please don't denigrate legitimate investors by equating them to lottery players.
I hesitate to say that much because you don't seem to care about actually understanding what you are talking about, anyway. I feel like I'm just feeding a troll.
You know nothing of whether the hedge worked, because you don’t know what it’s long term cost is outside some cherry picked return claims.
Meanwhile unhedged long term investors will book zero losses simply by not selling, and ultimately regain all and more without paying a hedging tax.
Meanwhile unhedged long term investors will book zero losses simply by not selling, and ultimately regain all and more without paying a hedging tax.
> You know nothing of whether the hedge worked, because you don’t know what it’s long term cost is outside some cherry picked return claims.
If you've studied the issue, as I have, you'd see that the claims being made, make sense. There isn't reason to question them unless you have some specific evidence to present (which would probably require you to be a client of the fund).
You seem to have an unusual perspective. You are super bullish about the market, to the point that you think this kind of event only happens every few decades and you think long-term investors are guaranteed to make money. Yet you are so anti-hedging that you compare it to a lottery and totally denigrate/downplay it. I don't know where that perspective comes from.
If you've studied the issue, as I have, you'd see that the claims being made, make sense. There isn't reason to question them unless you have some specific evidence to present (which would probably require you to be a client of the fund).
You seem to have an unusual perspective. You are super bullish about the market, to the point that you think this kind of event only happens every few decades and you think long-term investors are guaranteed to make money. Yet you are so anti-hedging that you compare it to a lottery and totally denigrate/downplay it. I don't know where that perspective comes from.
The greatest investor of all time, Warren Buffett, has never used hedging. That’s proof how unnecessary it is.
In the long run retained earnings drive market valuations higher. I don’t know how long this bear market will last, or how long it will be till the next one, but I know remaining fully invested beats market timing by the end every time.
In the long run retained earnings drive market valuations higher. I don’t know how long this bear market will last, or how long it will be till the next one, but I know remaining fully invested beats market timing by the end every time.
You shouldn't try to market time or hedge unless you know when to do it.
I find that I usually don't know when to, so I usually don't want to.
But there are exceptions to that. There are times when market timing and/or hedging make sense if you know enough.
> The greatest investor of all time, Warren Buffett, has never used hedging. That’s proof how unnecessary it is.
I'm not claiming hedging is necessary. I'm claiming hedging can be a rational thing to do. That Buffett doesn't use it, doesn't mean it can't be a rational thing to do. Not everyone has the same knowledge and circumstances as Buffett. Buffett's strategy is undoubtedly not the best strategy for everyone, though it's almost certainly the best strategy for him.
I find that I usually don't know when to, so I usually don't want to.
But there are exceptions to that. There are times when market timing and/or hedging make sense if you know enough.
> The greatest investor of all time, Warren Buffett, has never used hedging. That’s proof how unnecessary it is.
I'm not claiming hedging is necessary. I'm claiming hedging can be a rational thing to do. That Buffett doesn't use it, doesn't mean it can't be a rational thing to do. Not everyone has the same knowledge and circumstances as Buffett. Buffett's strategy is undoubtedly not the best strategy for everyone, though it's almost certainly the best strategy for him.
And what about the other months? From what I understand the strategy bleeds money until an event like this. In such a scenario you cannot really deploy that much capital.
Yes, but the bleed is so slow that it's entirely covered by a single tail event.
You can also hold other positions, this is just the fall back for when disaster inevitably strikes.
You can also hold other positions, this is just the fall back for when disaster inevitably strikes.
This is why people don't understand hedging. Some people will get it but for the majority it will never, ever compute.
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Not sure what you're referring to. I'm saying a large percentage number in the headline is misleading. It looks cool but the reality of tail hedging is your paying up for insurance premiums.
So this 3600 percent return is based on the premium you paid? The denominator is probably small... On the order of a few million is my guess..
So this 3600 percent return is based on the premium you paid? The denominator is probably small... On the order of a few million is my guess..
Yes. You have to pay for insurance.
And in terms of performance, you could have totally hedged out a portfolio for under 50bps (often well under) pretty much all the way through this market.
Universa did this but in a more sophisticated way...afaik, they created a portfolio where you got paid to hedge.
If this isn't clear: this is the kind of thing that people look back on and can't believe that it occurred. This is CLO manager in 2005 stuff. Literally incomprehensible. All because people cannot resist strategies that show small gains consistently. Retail investors cannot and won't ever understand that you will underperform, that is what a hedge is for, and that is how you reduce risk and end up with returns that crush the market. If you try to chase returns, you will get owned.
And in terms of performance, you could have totally hedged out a portfolio for under 50bps (often well under) pretty much all the way through this market.
Universa did this but in a more sophisticated way...afaik, they created a portfolio where you got paid to hedge.
If this isn't clear: this is the kind of thing that people look back on and can't believe that it occurred. This is CLO manager in 2005 stuff. Literally incomprehensible. All because people cannot resist strategies that show small gains consistently. Retail investors cannot and won't ever understand that you will underperform, that is what a hedge is for, and that is how you reduce risk and end up with returns that crush the market. If you try to chase returns, you will get owned.
The idea that you can insure a stock portfolio against market events is bogus on its face, without any fancy math or logical argument. Do I need to even discuss it?
And how much did they lose shorting the market every month over the past 10 years?
I would be interested to see a study of how buying puts on a small percent of your portfolio over time fares over just a 100% index strategy. I have to imagine that the no-insurance strategy fares better over long periods of time since you’re taking on greater risk. With puts you’re just offloading your tail risk onto someone else willing to take it on. If that were not true it would mean puts are chronically underpriced.
For the average investor with a long investing horizon it does not make sense to reduce your gain just to smooth out your equity curve. But if you are a few years away from retirement, for example, then maybe it makes sense as an alternative to just scaling back on risky assets.
For the average investor with a long investing horizon it does not make sense to reduce your gain just to smooth out your equity curve. But if you are a few years away from retirement, for example, then maybe it makes sense as an alternative to just scaling back on risky assets.
Unless you are an institutional investor, Puts are just expensive to have... Imagine you invest 3% of your portfolio in Puts, that money will be lost (probably cutting your 6% S&P500 return in half) only to give you a 500% / 1000% return on those 3%. There generally is a huge Spread (e.g., 10/30/50%) so you are already down the moment you buy the Puts.
The spread increases for “black swans” far out of the money events - so people are pricing the possibility of a crash into the Puts...
I doubt that a lot of people actually make money w/ Puts...
You would have lost your money most of the time for the past 15 yrs or so... May come out “even” if you get “lucky” and the market folds twice in between.
The only exception might be individual titles you believe are overpriced (e.g., 950 USD TSLA...).
Instead of buying Puts prior to retirement, just reduce the exposure. Btw, that is always true: Puts on stock index essentially have the same effect as lowering your equity invest (but you safe money).
Personally I doubt the Joe Doe investor will make any money w/ Puts on indices.
The spread increases for “black swans” far out of the money events - so people are pricing the possibility of a crash into the Puts...
I doubt that a lot of people actually make money w/ Puts...
You would have lost your money most of the time for the past 15 yrs or so... May come out “even” if you get “lucky” and the market folds twice in between.
The only exception might be individual titles you believe are overpriced (e.g., 950 USD TSLA...).
Instead of buying Puts prior to retirement, just reduce the exposure. Btw, that is always true: Puts on stock index essentially have the same effect as lowering your equity invest (but you safe money).
Personally I doubt the Joe Doe investor will make any money w/ Puts on indices.
I assume that there was a tax advantage at least: hedging (with puts or otherwise) lets you hold your stocks for longer.
How is that a tax advantage? If I am not mistaken unless you hold your stocks/ETFs shorter than a year the taxation stays the same.
What is the math behind that? I’m really curious because a 10-50% spread on Put options just makes them pretty unattractive imho and more a “gamble” than a real option (pun intended)
What is the math behind that? I’m really curious because a 10-50% spread on Put options just makes them pretty unattractive imho and more a “gamble” than a real option (pun intended)
Yea as you pointed out the long term capital gains is one area where you might have a tax advantage hedging. Imagine you bought a bunch of stock 11 months ago and you want to capture profits right now, it may be cheaper to buy puts out for 1 month and then sell for as long term capital gains.
Puts are of course only one way to hedge, some people hold cash, buy gold/bonds/natural resources, buy VXX, etc. Also the spread varies a lot, options on SPY tend to have tighter spreads than on a random stock, but I've found that submitting a "reasonable" offer (in the middle of the buy/ask prices, in-line with the black-scholes estimate) usually gets filled within the day.
Just buying a put without owning the underlying is definitely a risky gamble. But if you own 100 shares of the underlying it becomes a hedge since it limits your downside (at the cost of upside). And if you buy the put and sell a call you can limit any gains and losses to within a narrow band: https://www.investopedia.com/terms/c/collar.asp
Puts are of course only one way to hedge, some people hold cash, buy gold/bonds/natural resources, buy VXX, etc. Also the spread varies a lot, options on SPY tend to have tighter spreads than on a random stock, but I've found that submitting a "reasonable" offer (in the middle of the buy/ask prices, in-line with the black-scholes estimate) usually gets filled within the day.
Just buying a put without owning the underlying is definitely a risky gamble. But if you own 100 shares of the underlying it becomes a hedge since it limits your downside (at the cost of upside). And if you buy the put and sell a call you can limit any gains and losses to within a narrow band: https://www.investopedia.com/terms/c/collar.asp
I agree with you 100%
You can invest in a put index, for example: http://www.cboe.com/delayedquote/advanced-charts?ticker=^PUT
Nice! I wonder if they ever had a winning year before.
NOTE! I understand that a Black Swan Fund (a) may have very different goals from an ordinary fund, and (b) might be very successful and only ever have the one winning year.
NOTE! I understand that a Black Swan Fund (a) may have very different goals from an ordinary fund, and (b) might be very successful and only ever have the one winning year.
Wow. This is insane. What's the idea behind this? How can this be replicated by individuals on stock brokerages like robinhood,fidelity, etc?
Perhaps an oversimplification but basically you short the market at all times, losing a little money every month when times are good, but cashing in like crazy when something disrupts the market. Takes a pretty strong stomach to play that game.
Yes this is right. They buy puts and keep rolling them forward indefinitely waiting for things to go awry. The premiums on the puts eat into their overall returns in the hopes that one day there will be an event that makes back all those lost premiums. They aren't really disclosing enough information to be able to evaluate whether or not it actually works, so I suspect this is just a marketing ploy to get more clients.
Basically: buy OTM downside PUTs
Is that any way related to dollar cost averaging?
-not an investor
-not an investor
Not really. Dollar cost averaging means that you trickle money into the market rather than putting it all in at once.
For example, suppose you got a $10k net bonus at work, and decided to put it all into the stock market.
One approach is just to put it all in right now. If the market generally moves up for a while that works out fine. But if you did this right before a big dip, you now spend a while waiting for things just to get back to even.
If you took a DCA approach you might instead invest $500 every week for 20 weeks. Then if there’s a big dip, only a little of your money was invested with “bad timing” and much of it probably came in during the dips and therefore was a better deal.
Note, though, that you get the opposite effect if you consider an investment that would have happened right before a giant boom.
So basically DCA means you’re going to just track the market closer and have less timing risk compared to making larger less frequent investments.
For example, suppose you got a $10k net bonus at work, and decided to put it all into the stock market.
One approach is just to put it all in right now. If the market generally moves up for a while that works out fine. But if you did this right before a big dip, you now spend a while waiting for things just to get back to even.
If you took a DCA approach you might instead invest $500 every week for 20 weeks. Then if there’s a big dip, only a little of your money was invested with “bad timing” and much of it probably came in during the dips and therefore was a better deal.
Note, though, that you get the opposite effect if you consider an investment that would have happened right before a giant boom.
So basically DCA means you’re going to just track the market closer and have less timing risk compared to making larger less frequent investments.
It's very different. Dollar cost averaging (if you really follow it) has been very low risk for a very long time.
What Taleb says he's doing (betting on events that everybody assumes will not happen) tends to produce (nearly) guaranteed losses each year, with the hope that one day you make it all back and more.
What Taleb says he's doing (betting on events that everybody assumes will not happen) tends to produce (nearly) guaranteed losses each year, with the hope that one day you make it all back and more.
Well, just hedge all your positions, every year. It's actually really simple, if you buy a share of AAPL lets say, and it cost you ~$300 (pre-COVID), decide how much you want to spend on the hedge (let's say 1/3rd, so $100), and buy a LEAP (option that is >=1 year out) put.
Options are riskier than stock, so they tend to pay out much higher. With such an unexpected drop in march, you could have bought a LOT of very very cheap (let's say $1/contract to make the numbers simple) put options for like AAPL $250 let's say. Those options are cheap because they generally never hit, and even in early the market had not priced in the possibility of coronavirus being a global problem of this scale. If that contract is worth $10 later (which is still a very cheap option), you've made 1,000% return.
> A tail-risk hedge fund advised by Nassim Taleb, author of “The Black Swan,” returned 3,612% in March, paying off massively for clients who invested in it as protection against a plunge in stock prices.
All institutions hedge, it's just a matter of how much they hedge -- there are also some institutions that are intentionally "long volatility" (which means they expect volatility to increase). One way you could do this is to buy shares of a speculative instrument like $TVIX which is 2x fund of a thing called $VIX (the "Volatility Index"), you're going to lose money/maintain holdings (there's a thing called roll risk and other risks to consider just holding these instruments), but in a month like march when $VIX goes from ~$10 to ~$80, you're going to have a ~800% return.
Options are riskier than stock, so they tend to pay out much higher. With such an unexpected drop in march, you could have bought a LOT of very very cheap (let's say $1/contract to make the numbers simple) put options for like AAPL $250 let's say. Those options are cheap because they generally never hit, and even in early the market had not priced in the possibility of coronavirus being a global problem of this scale. If that contract is worth $10 later (which is still a very cheap option), you've made 1,000% return.
> A tail-risk hedge fund advised by Nassim Taleb, author of “The Black Swan,” returned 3,612% in March, paying off massively for clients who invested in it as protection against a plunge in stock prices.
All institutions hedge, it's just a matter of how much they hedge -- there are also some institutions that are intentionally "long volatility" (which means they expect volatility to increase). One way you could do this is to buy shares of a speculative instrument like $TVIX which is 2x fund of a thing called $VIX (the "Volatility Index"), you're going to lose money/maintain holdings (there's a thing called roll risk and other risks to consider just holding these instruments), but in a month like march when $VIX goes from ~$10 to ~$80, you're going to have a ~800% return.
AAPL is within 10% of it’s all time high, why pay massive annual hedging costs when it bounced back so quickly?
Super late, but AAPL arguably shouldn't be within 10% of it's all time high. Arguably it is at the current price because of unprecedented swift and decisive action on the part of the federal reserve and congress.
The Federal Reserve slashed the federal funds rate to near zero and starting "unlimited QE". Neither of those actions amount to buying equities directly, but them taking such an active part in the corporate bond market (they now have the ability to purchase investment grade bonds, though they hinted in a recent meeting that they didn't actually purchase any) has done enough to spur companies into raising cash.
Congress's CARES act and other bills actually lend 4.5B (500B leveraged up ~10x) to corporations with little oversight.
On top of all of this AAPL actually has a ton of cash on hand, so they are arguably a better buy than other companies. Arguably the downturn in march was panic selling and/or selling to cover margin requirements, but with the uncertainty on how the virus would affect various industries and for how long, de-risking is worthwhile.
Also, no need to spend massively on hedging -- hedge according to your risk appetite.
The Federal Reserve slashed the federal funds rate to near zero and starting "unlimited QE". Neither of those actions amount to buying equities directly, but them taking such an active part in the corporate bond market (they now have the ability to purchase investment grade bonds, though they hinted in a recent meeting that they didn't actually purchase any) has done enough to spur companies into raising cash.
Congress's CARES act and other bills actually lend 4.5B (500B leveraged up ~10x) to corporations with little oversight.
On top of all of this AAPL actually has a ton of cash on hand, so they are arguably a better buy than other companies. Arguably the downturn in march was panic selling and/or selling to cover margin requirements, but with the uncertainty on how the virus would affect various industries and for how long, de-risking is worthwhile.
Also, no need to spend massively on hedging -- hedge according to your risk appetite.
If you don’t need to sell anything from your portfolio in the next 5-10 years, why hedge? The vast majority of investors should be focused on the long term, so hedging is just a cost that reduces their returns.
At the beginning of the period yeah it may not be necessary to hedge, but as the fund allocation shifts it's probably a good idea.
I have a sneaking suspicion that even if every single investor was long-term focused, the staggering of the starting and restarting of various funds would make the action look sinusoidal.
I have a sneaking suspicion that even if every single investor was long-term focused, the staggering of the starting and restarting of various funds would make the action look sinusoidal.
It's simple. But it's expensive and it's not necessarily foolproof in a serious crash.
Agreed -- I did not mean to imply that it wasn't expensive -- but what you do is bake this into the positions. Entering a position without a hedge is dangerous, though of course equities are much less likely to have drastic drops (depending on the company). Hedging is still a good idea for the usual investor -- but obviously don't take losses on puts for years trying to time a downturn.
One thing I didn't note is the difficulty in timing -- if you held your puts too long, they would have gone back to zero with the insane rally we saw last month, for many reasons.
One thing I didn't note is the difficulty in timing -- if you held your puts too long, they would have gone back to zero with the insane rally we saw last month, for many reasons.
The fund would not have such a simple construction - but you can build a simple tail risk strategy with options. Buy deeply out of the money puts on SPX and periodically roll them. You are now betting on a tail risk wiping out the market (although paying a continuous premium to do so).
I think there are mutual funds that do something like this strategy, e.g. TAIL:
https://www.cambriafunds.com/tail
From what I have read, Universa's clients are institutional investors and super rich people. Not sure how easy this is to reproduce as a less sophisticated investor.
One of my good friends follows a strategy like this by simply buying puts against SPX. He is very bearish on the market in general, and has missed out on a lot of growth in the last decade, but in his case it did “finally pay off” recently.
As with any other strategy, though, it’s not really valid to compare just the recent months, you’d have to evaluate his total return over say the last ten years, and I don’t know how that stacks up.
As with any other strategy, though, it’s not really valid to compare just the recent months, you’d have to evaluate his total return over say the last ten years, and I don’t know how that stacks up.
I think it's very difficult. You're looking at losing significant money 9 years out of 10. (Or 20 years out of 20, who knows? It's black swans baby.) So you can only do this with a very small amount of money. How much time can you afford to spend managing say 3% of your total liquid assets?
VXTH is an index which runs a tail risk strategy: http://www.cboe.com/products/vix-index-volatility/vix-relate...
It holds the S&P500 and buys monthly call options on VIX.
It holds the S&P500 and buys monthly call options on VIX.
Even the super rich get duped into paying for dumb strategies.
Is there a way for a small, non-institutional investor to participate in Universa?
They're conveniently not reporting their overall returns which would include all the underperformance from the cost of hedging through a 10 year bull market. There's also no mention of the fees and how much they eat into the returns.
Actually they somewhat did:
"Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%. The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index."
This seems to suggest they needed to include the bad 2008-2009 time to come out looking better than just plain dca etf investing...
This seems to suggest they needed to include the bad 2008-2009 time to come out looking better than just plain dca etf investing...
The way it's worded is very confusing to me. Kind of seems like they're trying to hide the fact that they underperform. I imagine once they take out their performance fees (usually 2% per year plus 20% when they exceed the benchmark) those gains aren't as impressive.
yeah but you would have a capital gains tax on that option trade
This report from 2018 explains how they outperformed the S&P 500 over the 10 years to that point:
https://www.zerohedge.com/news/2018-09-22/how-fund-betting-e...
https://www.zerohedge.com/news/2018-09-22/how-fund-betting-e...
VSTAX's 10 year return since 2010 was 11.29% annually (191% total return).
That means Universa could've lost around 23% every year until 2020, gain 4144% in 6 months and still beat the index (according to my naive arithmetic at least).
(0.77^10) * 4244% = 311% -> 211% total return
this like saying they bought insurance and the insurance paid out. This is not an investment strategy in of itself.
Dude has been talking his book hard for months.
As he should - It's invaluable knowledge he's trying to share.
* If we're talking about Antifragile. I haven't read the others yet.
I agree but I meant http://www.investorwords.com/8436/talking_my_book.html
The returns are on the premium paid for options (or margin), not the notional (which is where fees are paid). That $4bn fund is counting its performance on only $40 million of invested capital (of the $4bn). So they are up 3600% on $40 million.
Universa’s model is they take 3.5% of a portfolio value per year and use it to buy puts over the course of a year. So at any time, maybe they have 30-60 basis points of the portfolio in puts. So they are up 3600% on 30 basis points or like 12%.
"Spitznagel included a chart in his letter showing that a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%."
"The same portfolio would have produced a compounded return of 11.5% a year since March of 2008 versus 7.9% for the index."
2.6% per annum is a lot of outperformance, albeit not quite as eye popping as 3600%.