Mark Spitznagel, author of "Dao of Capital" and among Wall Street's most bearish investors, is (profitably) holding out for a disaster. Despite noting that "The Fed has taken it further than it has ever taken it before," NY Times reports that Spitznagel's fund Universa has profited strongly even as stocks hit record highs. Large pessimistic bets usually lose a lot of money when stocks are rising, but Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year. While ackowledging Fed policy is capable of driving stock prices higher, Spitznagel warns, it will ultimately be self-defeating, "there is only so much debt that an economy can take on."
The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period?
Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns.
Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30 percent return last year, according to firm materials that were reviewed by The New York Times. In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.
At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.
This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates.
“The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview, during which he gave an overview of Universa’s approach. “It allows you to be long, but it gets you in position to be short when it’s all over,” he said.
The news that Universa has been producing strong returns since 2009 will surprise many on Wall Street.
In previous media reports, Mr. Spitznagel seemed content with descriptions that his fund had small losses each year as he wagered against the market. The recent fund materials that contain the positive numbers may be marketing materials aimed at selling a type of financial catastrophe insurance to investors who are getting jittery about the stock markets’ gravity-defying rise. The materials show how bearish bets could be paired with broad holdings of stocks — and still produce gains.
“This is a way to be responsibly long,” Mr. Spitznagel said.
The Universa strategy has produced gains of 10 percent this year, slightly less than the stock market overall. It’s been up every year since 2008, according to the materials.
A Wall Street hedging expert said that adding such a bearish bet to a big holding of stocks could erase as much as 8 percent from the value of the portfolio each year.
Mr. Spitznagel, however, contends that Universa’s hedge costs far less than that. Universa, he said, has been able to buy protection against a stock market crash at a price that makes the firm’s overall strategy viable. But doing so has not been easy, Mr. Spitznagel contended. “You’ve got to be buying when other people are selling it — and that’s very hard to do,” he said.
Mr. Spitznagel is certain that another collapse will come.
He hails from the Austrian school of economics that believes great harm can result when a central bank holds interest rates at low levels for a long time. The cheap money prompts investments across the economy that will later prove uneconomical and go sour, the Austrians say.
And it may not even take a sharp rise in interest rates to set off a bust, they add. Increasing debt levels may be what ultimately checkmates the Fed, Mr. Spitznagel argues. “There is only so much debt that an economy can take on,” he said.
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