It was a hedge heard across the globe. On August 24th, 2015 a flash crash happened which sent the Dow Jones down by more than 1,000 points. Around the world, global markets tanked, and traders got wiped out, but there was one big exception. Mark Spitznagel a bearish hedge fund manager made a killing on that day. The Wall Street Journal reported that the fund made a record $1 billion profit on so-called Black Swan hedges. Considering the Nassim Taleb advised fund, Universa investments, only managed around $6 billion at that time, the gain is even more impressive.
But what really happened? Some questioned the numbers with critics arguing that the math was just impossible to add up to $1 billion and suspected the fund tipped the WSJ to get favorable press. To this day no one is sure what happened, but now ValueWalk has some exclusive details.
We obtained a copy of the secretive fund’s 2018 letter to investors which sheds light on the topic. Additionally, Mark agreed to give us some details about the strategy Universa investments uses to get outsized returns when markets crash.
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The Universa investments 2018 letter starts off as follows:
This month marks the ten-year anniversary of Universa’s tail hedging program (the “Black Swan Protection Protocol”). As we ring the bells and reflect on how far we’ve come, I am reminded of an old Russian proverb that warns, “Dwell on the past, lose an eye. Forget the past, lose both eyes.”
What a diverse decade it has been, spanning a great bust and boom, some very high volatility and some very low. It was a superb test for us, and a little retrospection is in order. So let’s review how we performed as a risk mitigation strategy for you, including in comparison with other strategies that also presumed to serve such a function. Risk mitigation performance must of course be measured by its “portfolio effect”—specifically, the impact it has on the compound annual growth rate (CAGR) of the entire portfolio whose risk it is trying to mitigate. As I will discuss later in this letter, this is all that really matters in risk mitigation, and has always been our focus. It is where the rubber meets the road.
Since ValueWalk Premium is newish, we wanted to tell readers about our in-depth coverage of the investment firm. We currently have three articles planned with two already posted, you can check them out below.
Stay tuned for parts III and IV on Universa investments in the coming week or two.
On a related note, you should check out our hedge fund resource center for Q2 2018 which is now published and updated daily (and sometimes more than once a day) with lots of excellent coverage so far and much more coming. Click here