Hedging strategies got one of their toughest trials ever in March — and many failed. Investors in Universa Investments’ standalone tail hedge strategy got what they paid for. 


Universa measures its risk mitigation performance by its portfolio effect — the impact it has on the compound annual growth rate (CAGR) of an investor’s entire portfolio. In a letter to clients obtained by Institutional Investor, Universa updated the net returns of the hypothetical portfolio it recommends to clients: a 3.33 percent allocation to the Universa tail risk strategy, coupled with a 96.67 percent position in the Standard & Poor’s 500 stock index, a proxy the firm uses for the systematic risk being mitigated.

In the month of March 2020, the hypothetical portfolio had a compound annual growth rate of 0.4 percent. In March, the Standard & Poor’s 500 stock index lost 26.2 percent at its lowest point, and had declined 12.4 percent as of the end of the month. Since the end of 2019, Universa’s hypothetical portfolio had a CAGR of 16.2 percent, compared with the S&P 500’s return of 4.5 percent. The portfolio has produced a CAGR of 11.5 percent since inception in March 2008. 

The firm only sends a client letter once a decade — the last one was sent to clients in March 2018 — because the strategy’s objective is long-term risk mitigation. But Mark Spitznagel, president and chief investment officer of Universa, told clients that he wanted to communicate now, given the extraordinary events in March. 


“It is a good time to reflect again on how we have performed for you as a risk mitigation strategy, if for no other reason than to give you some reassurance and even solace following one of the scariest months for markets on record,” wrote Spitznagel. “This historical perspective serves as a reminder that, going forward, there is every good reason to expect that protecting against large drawdowns with Universa should remain the superior risk mitigation strategy, saving you the needless costs and risks associated with most financial engineering and modern finance solutions, while providing superior “crash-bang-for-the-buck” should the crash continue.” 


Universa also crunched the numbers on other hypothetical portfolios, using different hedges. A portfolio made up of a 3.33 percent allocation to the CBOE Eurekahedge Tail Risk index, for example, and a 96.67 percent allocation to the S&P 500 lost 11.4 percent in March and has gained 5.2 percent since the end of 2019. Other sample portfolios showed the returns using hedges such as the CBOE Eurekahedge Long Volatility index, gold, the CTA index, and traditional fixed income. Investors using Universa’s tail hedge beat all of them. 

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Spitznagel stressed in the letter how the firm’s tail-risk strategy is not just another source of uncorrelated returns and emphasized how it’s different from a tactical market call. 


“As you know, I am a strong believer that, if a risk mitigation strategy merely slashes a portfolio’s risk at a cost of growth of capital in that portfolio... then it was simply ineffective and probably not worth doing,” he wrote. “After all, what was the point? The goal of risk mitigation must be to achieve the portfolio effect of raising the compound annual growth rate (CAGR), and thus the wealth in the end user’s entire portfolio, by mitigating risk in that portfolio.” 

Universa’s CIO ended the letter with a look to the future, stressing that the world is still in a historic global financial bubble. Spitznagel believes markets were “priced for perfection” and remain expensive despite the selloff. 


“So this is far from over; the current pandemic is merely threatening to pop the bubble. (And, as we all can plainly see, the powers that be are likely running out of ways to keep the bubble inflated.),” Spitznagel concluded. “Make no mistake, it’s the systemic vulnerabilities created by this unprecedented central-bank-fueled bubble, and the crazy, naïve risk-taking and leverage that accompanies it, that makes this pandemic so potentially destructive to the financial markets and the economy.”