
Universa tail fund returned 3,600% in March - ZeljkoS
https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-tail-risk-fund-returned-3-600-in-march
======
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%.

~~~
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.

------
oskarth
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...](https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-
CRITERION/dp/9814383139) 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](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...](https://www.amazon.com/Dao-Capital-
Austrian-Investing-Distorted/dp/111834703X)

There's also Dynamic Hedging by Taleb [https://www.amazon.com/Dynamic-Hedging-
Managing-Vanilla-Opti...](https://www.amazon.com/Dynamic-Hedging-Managing-
Vanilla-Options-ebook/dp/B000UG9JQA) which talks about these options and their
structure in more technical manner, though I haven't read it.

~~~
hardwaresofton
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.

~~~
caseysoftware
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?

~~~
chillacy
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.

------
paulpauper
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...](http://greyenlightenment.com/does-tail-hedging-work-it-depends/)

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.

~~~
huffmsa
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

~~~
beervirus
If your burn rate is 10% per year, the “when” is what matters.

~~~
huffmsa
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.

------
bretthopper
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.

~~~
hooloovoo_zoo
That's interesting but those endpoints seem cherry-picked given the strategy.

~~~
gwern
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...](https://www.ft.com/content/602c45e1-219c-49b2-ab17-9b47791fd038)

> 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.

~~~
moistly
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.

~~~
gwern
> 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...

------
gumby
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!

~~~
valuearb
That claim is based on Cherry picked endpoints and probably doesn’t include
impact if his fees.

~~~
gumby
Quite possible, as that is a common practice.

------
jawns
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.

~~~
throwphoton
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.

~~~
celticninja
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.

~~~
valuearb
If you aren’t leveraged, it’s trivial to ride out crashes. Why drag your
returns down with expensive insurance?

------
rayuela
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!"

~~~
paulpauper
agree. these hedge fund managers are just glorified salespeople. even ray
dalio.

~~~
brenden2
Dalio is a really good salesman though, have to give him credit.

------
rkapsoro
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.

~~~
shivasword
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.

------
juskrey
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.

------
erentz
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](https://www.artemiscm.com/welcome#research)

~~~
SkyMarshal
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.

------
javert
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.

~~~
valuearb
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.

~~~
javert
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.

~~~
valuearb
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.

~~~
javert
> 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.

~~~
valuearb
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.

~~~
javert
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.

------
anonu
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.

~~~
hogFeast
This is why people don't understand hedging. Some people will get it but for
the majority it will never, ever compute.

~~~
anonu
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..

~~~
hogFeast
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.

~~~
pnako
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?

------
carlsborg
And how much did they lose shorting the market every month over the past 10
years?

------
jliptzin
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.

~~~
looping__lui
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.

~~~
chillacy
I assume that there was a tax advantage at least: hedging (with puts or
otherwise) lets you hold your stocks for longer.

~~~
looping__lui
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)

~~~
chillacy
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](https://www.investopedia.com/terms/c/collar.asp)

------
mcnamaratw
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.

------
alphagrep12345
Wow. This is insane. What's the idea behind this? How can this be replicated
by individuals on stock brokerages like robinhood,fidelity, etc?

~~~
keithly
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.

~~~
burlesona
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.

------
tremguy
Is there a way for a small, non-institutional investor to participate in
Universa?

------
brenden2
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.

~~~
markvdb
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...

~~~
paulpauper
yeah but you would have a capital gains tax on that option trade

~~~
markvdb
Not over here. Belgium is the world taxation champion, but it has no capital
gains tax on equities. As you can imagine, accumulating etfs are quite popular
here...

------
JoshTko
this like saying they bought insurance and the insurance paid out. This is not
an investment strategy in of itself.

------
themark
Dude has been talking his book hard for months.

~~~
imperialdrive
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.

~~~
themark
I agree but I meant
[http://www.investorwords.com/8436/talking_my_book.html](http://www.investorwords.com/8436/talking_my_book.html)

