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An investor whose fund returned 4,144% in the 1st quarter explains why his successful strategy is too dangerous for the average trader — and calls continued Fed stimulus ‘very, very destructive’


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An investor whose fund returned 4,144% in the 1st quarter explains why his successful strategy is too dangerous for the average trader — and calls continued Fed stimulus ‘very, very destructive’

Bloomberg TV Mark Spitznagel, the chief of Universa Investments, saw his fund return 4,144% in the first quarter. He explained to CNBC on Monday why tail-risk hedging is generally a “costly and bad strategy.” Spitznagel cautioned at-home investors against using the investment technique. Instead, he said, they need to be “realistic about risk-mitigation strategy.” He…

An investor whose fund returned 4,144% in the 1st quarter explains why his successful strategy is too dangerous for the average trader — and calls continued Fed stimulus ‘very, very destructive’

Screen Shot 2020 08 17 at 12.45.11 PMBloomberg TV

  • Mark Spitznagel, the chief of Universa Investments, saw his fund return 4,144% in the first quarter.
  • He explained to CNBC on Monday why tail-risk hedging is generally a “costly and bad strategy.”
  • Spitznagel cautioned at-home investors against using the investment technique. Instead, he said, they need to be “realistic about risk-mitigation strategy.”
  • He also described the Federal Reserve stimulus as “very destructive,” creating a “massive disparity of wealth.”
  • Visit Business Insider’s homepage for more stories.

The prospect of a 4,144% return is tempting. But Mark Spitznagel, the chief of the fund that generated it, urged retail investors not to try similar strategies at home.

The Universa Investments chief told CNBC on Monday that tail-risk hedging is generally a “costly and a bad strategy.”

“You can’t just talk about tail-risk hedging as a thing, as a sort of commoditized entity,” Spitznagel said. “This is something that I’ve been doing for 25 years, and people enter the space, and all of the sudden it’s a thing, which is nice. But in many ways, tail-hedgers are more different than they are alike. So we have to be careful of that.”

Read more: Bruce Fraser outperformed the S&P 500 by nearly 286% as a hedge fund manager before switching to real-estate investing. He details the strategy he used to amass more than 1,600 multifamily units.

In April, The Wall Street Journal reported on a letter to clients in which Spitznagel highlighted the extreme returns his fund strategy saw during the market collapse: The S&P 500 index lost 12% in March, but an investor with 3.3% of assets in Universa’s tail-risk strategy and the rest in an index fund tracking the benchmark would have returned 0.4%.

According to The Journal, no other risk-mitigation strategy, such as diversifying with gold or bonds, would have had a positive return in that period.

Not everyone agrees that this strategy is a good one. AQR criticized it in April, saying that it works in the short term but not in the long term. But Spitznagel is nonplussed.

Read more: Charles Schwab’s stock-picking chief told us why a COVID-19 vaccine would trigger a mass exit from tech stocks — and pinpoints 3 companies that would benefit instead

“They can’t get the kind of explosive downside protection that we do. This is the derivatives market, and everyone should really stay away from that,” Spitznagel said. “These are weapons of mass destruction in the wrong hands, certainly. I think it’s enough for people to just be realistic about the risks, realistic about the risk-mitigation strategy.”

The investment chief also said that the Federal Reserve was accelerating the market bubble. The Fed’s latest moves to prop up markets and small businesses “feel good” and “look good” in the short run, he said, but “the long-run effects of this stuff is very, very destructive.”

Spitznagel added: “We’re also not paying attention to the massive disparity of wealth that’s being created when we inflate these financial markets. It’s unconscionable, really.”

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