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%.
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.
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.
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.
> 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.
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.
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.
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.
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.
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.
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.
> 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]
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.
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.
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?
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!
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.
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.
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.
> 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.
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!
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.
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.
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).
“ 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.
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.
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!"
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.
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.
Readit News
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%.
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.
So if you have a 4b portfolio, they're charging fees on the 4b.
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 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.
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.
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.
That seems very, selective.
i would not be surprised if it much worse. if they truly had a good strategy why tell everyone?
There is also ego and prestige, and Taleb seems to desire both to a great degree.
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.
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.
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.
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.
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?
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!
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.
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
> 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.
> 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.
> 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!
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.
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.