5/6/2020 A ‘Black Swan’ Fund Makes $1 Billion - WSJ

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https://www.wsj.com/articles/nassim-talebs-black-swan-fund-made-1-billion-this-week-1440793953

MARKETS

A ‘Black Swan’ Fund Makes $1 Billion

As market collapsed, hedge-fund firm Universa Investments gained roughly 20% on Monday

Nassim Nicholas Taleb speaks at a conference in India in January about black-swan

events.
PHOTO: MOHD ZAKIR HINDUSTAN TIMES GETTY IMAGES

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5/6/2020 A ‘Black Swan’ Fund Makes $1 Billion - WSJ

By Juliet Chung
Updated Aug. 30, 2015 8 54 am ET

The recent market rout caught some star Wall Street traders by surprise. But not a
hedge-fund firm affiliated with “The Black Swan” author Nassim Nicholas Taleb, which
gained more than $1 billion on a strategy that seeks to profit from extreme events in
financial markets.

Universa Investments LP was up roughly 20% on Monday, according to a person

familiar with the matter, a day when the Dow Jones Industrial Average collapsed more
than 1,000 points in its largest intraday point decline. The blue-chip index finished
down 588 points on the day.

The fund’s returns for the year climbed to roughly 20% through earlier last week, this
person said. Universa holds positions designed to protect about $6 billion in client
assets, according to people familiar with the firm.

“This is just the beginning,” said Universa founder Mark Spitznagel, referring to the
market volatility last week. His longtime collaborator, Mr. Taleb, who advises Universa,
is a professor at New York University and is known for his pessimistic forecasts on the
global economy.

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“The markets are overvalued to the tune of 50%, and I’ve been saying that for some
inbox.
time,” said Mr. Spitznagel, who has spent the past several years warning of a coming
correction he viewed as inevitable given the easy-money policies by central banks
around the world.

Miami-based Universa and other “black swan” hedge funds that seek to reap big
rewards from sharp market downturns emerged as winners amid the world-wide
volatility of the past week, according to investors.

These funds “so far this month have been very strong,” said Gregg Hymowitz, founder
of New York-based hedge-fund investor EnTrust Capital Inc., who has invested in
several such funds since 2011. “If your house burns down, you want to have some
protection.”

The funds’ nickname refers to the long-held belief that all swans are white, proved false
when European explorers found black swans in Australia. In finance, a black-swan
event refers to something extreme and highly unexpected, like the financial crisis. Mr.
Taleb popularized the term in his best-selling 2007 book.

Some funds racked up double-digit percentage gains in the past week, largely on
Monday. Capstone Investment Advisors LLC is up 52%, or nearly $100 million, for
August through Wednesday, nearly all of it coming from gains last Friday through
Tuesday, according to a person familiar with the matter. Black Eyrar, a fund of London-
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5/6/2020 A ‘Black Swan’ Fund Makes $1 Billion - WSJ

based 36 South Capital Advisors LLP, was up in the double-digit percentages for August
through Friday, according to a person familiar with the fund. A similar fund at Boaz
Weinstein’s Saba Capital Management LP was up 14% for August through Friday,
according to an investor, bringing its returns for the year to 1%.

“We wait for times like these,” said Jerry Haworth, 36 South’s co-founder and chief
investment officer.

Black-swan funds came into vogue in the years after the financial crisis, as concerns
mounted about another recession, a potential increase in interest rates by the Federal
Reserve and a European crisis, investors said.

Their strategies aren’t an easy sell to prospective investors because the funds tend to
lose money steadily for several years before making a profit. Some critics said they can
be too expensive and lead clients to pull out at the wrong time.

Universa, which was founded in 2007, first attracted attention for its outsize gains in
2008, racking up more than 100% profits for many of its clients.

It profited in 2010, and in 2011 it notched gains of about 10% to 30% for clients. In other
years, it has lost small amounts of money.

The firm focuses on finding cheap, shorter-dated options on the S&P 500 and other
instruments it expects to rise in value amid a notable downturn. During the past week,
the value of put options that Universa bought over the past one to two months jumped,
said people familiar with the matter. A put option confers the right, but not the
obligation, to sell a security at a specified price, usually within a limited period.

Mr. Spitznagel, a former Chicago Board of Trade pit trader who worked at the
proprietary-trading desk of Morgan Stanley, described Monday’s fall as a “blip”

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5/6/2020 A ‘Black Swan’ Fund Makes $1 Billion - WSJ

compared with what could still happen, though he said it was unusual because of the
speed of the decline and its timing so close to market highs.

“The stock market has climbed to where it has over the six-plus years because of
central banks, but people forget how crazy and unsustainable that is,” Mr. Spitznagel
said.

Unlike a typical hedge fund, clients don’t hand over their entire account to Universa’s
Black Swan Protection Protocol. Instead, they designate a certain pool of assets, a
notional value, that they seek to hedge, or protect from extreme losses. Typically,
Universa hedges against clients’ U.S. stockholdings.

For example, a client that has a $100 million account with Universa would pay the firm
a flat annual fee of 1.5% on that amount, or $1.5 million. The client would transfer to
Universa typically less than 10% to fund the purchase of hedges for its account.
Universa managed roughly $300 million in assets at the end of last year, according to a
regulatory filing.

Write to Juliet Chung at juliet.chung@wsj.com

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