“During the financial crisis, when most hedge funds suffered catastrophic returns forcing many to gate their investors, Mark Spitznagel, who is perhaps best known for the phrase “I spend all my time thinking about looming disaster“, made what the WSJ reported was “huge gains” with his “black swan” targeting hedge fund Universa Investments, which not incidentally is advised by Nassim Taleb. Then, in August 2015 during the infamous ETFlash crash, his fund reportedly made a gain of about $1 billion, or 20%, during a single, turbulent day when the VIX briefly broke and ETF trading went haywire for several hours.
Spitznagel went on: “the standalone Universa tail hedge strategy’s life-to-date mean annual net return on invested capital (expressed as returns on a standardized capital investment since inception in March 2008, and using yours from your start date) has been +76% per year. (During this period, as a reminder, the SPX has gained 151%. Are we really such an “über-bearish” strategy?).
In explaining how the Universa fund adds fat-tail protection to a diversified portfolio, Spitznagel writes that:”
We have managed to consistently achieve our aim of raising our risk mitigated portfolio CAGRs by lowering risk, pandemic or no pandemic. And, as I have said many times before, it has worked so well simply because of the mathematics of compounding: the big losses are essentially ALL that matter to your rate of compounding, not the small losses—and not even the big or small gains. The big losses literally destroy your geometric returns and, equivalently, your wealth, through what I have called the “volatility tax.” For risk mitigation to be effective, it therefore must focus primarily on mitigating those big, rare losses (the tails). More specifically, risk mitigation must have a very high “bang-for-the buck” in a portfolio when the chips are down in a crash, relative to the portfolio cost of that “buck” the rest of the time—a very “convex” (tail) hedge. None of these other competing strategies have shown that.