Universa tail fund returned 3,600% in March
bloomberg.com
bloomberg.com
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%.
i would not be surprised if it much worse. if they truly had a good strategy why tell everyone?
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...
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).
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.
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.
Imagine that
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's the whole premise, that inevitably they will be right.
That seems very, selective.
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.
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 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.
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, 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.
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.
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!
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/
"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.
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?
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.
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 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 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.
“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...
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.
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.
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.
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.
Meanwhile unhedged long term investors will book zero losses simply by not selling, and ultimately regain all and more without paying a hedging tax.
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.
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.
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.
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..
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.
You can also hold other positions, this is just the fall back for when disaster inevitably strikes.
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.
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.
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)
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
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.
-not an investor
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.
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.
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.
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 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.
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.
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.
It holds the S&P500 and buys monthly call options on VIX.
This seems to suggest they needed to include the bad 2008-2009 time to come out looking better than just plain dca etf investing...
https://www.zerohedge.com/news/2018-09-22/how-fund-betting-e...