[justinmares]

The 3600% return in March is sort of misleading.

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%.

[yellowstuff]

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.

[eximius]

Life insurance is never the road to riches for the person it covers. :)

[mtnGoat]

This is generally true, but that TV show "American Greed" has shown a number of folks that tried to get the riches without actually dying. I wonder how many have pulled it off.

[justinmares]

Exactly

[motohagiography]

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.

[justinmares]

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.

[whatok]

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.

[toshk]

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.

[beagle3]

> 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.

[toshk]

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.

[AznHisoka]

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.

[refurb]

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.

[danharaj]

> it's just you doing the same thing and suddenly being right.

That's the whole premise, that inevitably they will be right.

[duxup]

So we're talking about a big return on ... a small piece of their portfolio?

That seems very, selective.

[craigkilgo]

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.

[whatok]

% returns are usually quoted vs AUM; not invested capital.

[cjbenedikt]

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.

[notechback]

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.

[paulpauper]

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?

[kevstev]

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.

[mrscottson]

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.

[kevstev]

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.

[beagle3]

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.

[tomhoward]

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.

[paulpauper]

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.

[MR4D]

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).

[tomhoward]

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...

[chosenbreed37]

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...

[tomhoward]

Yes, it’s an insurance policy, not a standalone investment strategy.

[huffmsa]

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.

[paulpauper]

>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.

[huffmsa]

Oh, so taleb is hedging his hedge fund by doing other revenue generating things?

Imagine that