Investor Whose Fund Returned 4,144% in Q1 Explains Why His Successful Strategy Is Too Dangerous For The Average Trader – And Calls Continued Fed Stimulus ‘Very, Very Destructive’

Bloomberg TV

• Mark Spitznagel, head of Universa Investments, told CNBC on Monday that tail risk hedging, the fund’s risk mitigation strategy that returned 4,144% in the first quarter, was generally “expensive and a bad strategy.” .
• Spitznagel cautioned local investors against using tail risk hedging. Instead, he said, they need to be “realistic about the risk mitigation strategy.”
• He also described the Federal Reserve’s stimulus as “very destructive”, creating “a huge disparity in wealth”.
• Visit the Business Insider homepage for more stories.

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

The head of Universa Investments told CNBC on Monday that hedging tail risk, the fund’s risk mitigation strategy that led to forty times the first quarter gains, was generally “expensive and a bad strategy.” .

“You can’t just talk about extreme risk hedging as some sort of commoditized entity,” Spitznagel said. “It’s something I’ve been doing for 25 years, and people come into space, and all of a sudden it’s a thing, which is good. But in many ways, tail hedges are more different than they are. So we have to be careful of this. “

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

According to The Journal, no other risk mitigation strategy, such as diversification with gold or bonds, would have had a positive return during this period.

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

When CNBC asked Spitznagel for advice on how local investors can mitigate risk, he cautioned against using Universa’s strategy.

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

The chief investment officer also said the Federal Reserve was accelerating the market bubble. The Fed’s latest moves to support markets and small businesses “feel good” and “look good” in the short term, he said, but “the long term effects of these things are very, very destructive. “.

Spitznagel added: “We also don’t pay attention to the huge disparity in wealth that is created when we inflate these financial markets. It is truly unacceptable.”

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