When Mark Spitznagel isn't herding goats, he plays in the wildest corners of financial markets, where he’s an expert in trades that carry deceptive risks
perched atop a hill on the edge of Lake Michigan, hedge fund investor Mark Spitznagel is dodging the coronavirus in a setting reminiscent of a Winslow Homer painting–and relishing one of Wall Street’s greatest investing coups.
Until one day–maybe only every five or ten years–a black swan appears, terrorists ram jets into skyscrapers or a global pandemic freezes the global economy. Then the tables turn hard and Spitznagel makes an enormous amount of money, more than enough to make up for all those many days of small losses. And those caught feeding on Spitznagel’s bait find themselves trapped in a trade that carries almost unfathomable losses. Sometimes they’re wiped out entirely.
Spitznagel has built a career feasting on traders’ greed—prioritizing quick gains over prudent risk taking. To earn these easy gains, traders readily assume “tail risks” or huge but extremely remote potential losses. Eventually, someone gets caught. When a financial panic, or an unexpected event like the coronavirus surfaces, Spitznagel’s firm converts from what once looked like a charity into a financial powerhouse that’s fully stocked with valuable hedges.
Universa’s 4,144% payout cost its investors about 1% annually due to Universa’s hefty “2 and 20” hedge fund fees, peranalysis of public filings. 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.
He then moved to the trading arm of a Japanese bank just in time to witness the 1997 Asian financial crisis and the default of Russia, which caused the Nobel laureate backed hedge fund, Long Term Capital Management, to lose $4.6 billion and collapse. This convinced Spitznagel to hone an investing style that would profit from panics. In 1999, Spitznagel matriculated to NYU’s Courant Institute for mathematical sciences, studying under “Black Swan” theorist Nassim Taleb.
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