Founder of hedge fund up 4,000%: Our market risk strategy prime for this epic 'boom-bust cycle'

Published Mon, Aug 17 202012:46 PM EDTUpdated Mon, Aug 17 20202:23 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

(This story is for CNBC Pro subscribers only.) The founder of Universa Investments, which scored a 4,000% return in the first quarter, told CNBC on Monday that the coronavirus crisis has exemplified the mission of his hedge fund. "This environment is very much our environment," Mark Spitznagel said in an interview with Leslie Picker on "Squawk on the Street." "We are in a boom-and-bust cycle, an epic, monumental boom-bust cycle and this is really what a strategy like Universa's is here for." Spitznagel, also Universa's president and chief investment officer, used a complex risk mitigation strategy known as "tail-risk hedging." It positions the fund to profit from steep — but infrequent — market corrections, like those that can be triggered by so-called Black Swan events. In the first quarter of this year, when Universa netted its 4,144% return, financial markets experienced significant turmoil as the coronavirus pandemic intensified. The S & P 500 plummeted from record highs on Feb. 19, reaching a virus-induced bottom on March 23. In all, the index fell about 35%, far exceeding the 20% threshold for a bear market, before mounting a robust comeback on Federal Reserve action and fiscal stimulus from Congress and the White House. As of Friday's close, the S & P 500 was less than 1% away from its February record close of 3,386.15 — nearly 54% above its March 23 low heading into Monday. Spitznagel said he considers Universa to be "just another form of risk mitigation." However, people who focus only on Universa's eye-popping return in the first quarter are "kind of missing the point," he said, emphasizing that risk mitigation is a long term approach. Saying he understands the criticism of tail-risk hedging as volatile and potentially costly, Spitznagel said, "Forget about just what it does for you in a crash. There's a payoff in a crash, but then what does it do for you when there's no crash?" "Universa really exists to make this point that risk mitigation really should, when effectively done, raise the rate at which you compound capital," Spitznagel said. "It should raise your wealth at the end of the day or what was the point?" "This flies very much in the face of modern finance," he added. Spitznagel stressed that retail investors on their own should avoid the complex strategies employed by Universa. "They can't get the kind of explosive downside protection that we do. This is the derivatives markets and everyone should really stay away from that," he said. "These are weapons of mass destruction in the wrong hands, certainly." Universa is advised by "The Black Swan" author Nassim Nicholas Taleb, who on CNBC at the end of July said, "If you don't have a tail hedge, I suggest not being in the market." He cited as the reason a "huge amount of uncertainty." Taleb described a tail-hedge as a way to "keep your stocks for their upside and protect your downside." With the S & P 500 flirting with a new record high close in recent days, Spitznagel said he believes stocks have become expensive. "I don't think there are many people around right now that would argue against the fact that markets are quite overvalued. Maybe they'll get more overvalued." He stressed he does not think markets are necessarily "on the cusp" of another bust. But he added, "Timing these things certainly is impossible. But look, stock market crashes happen as the direct result of overvaluation."

Mark Spitznagel, president and chief investment officer of Universa Investments LP, speaks during the Bloomberg Invest Summit in New York, U.S., on Wednesday, June 7, 2017.

Misha Friedman | Bloomberg | Getty Images

(This story is for CNBC Pro subscribers only.)

The founder of Universa Investments, which scored a 4,000% return in the first quarter, told CNBC on Monday that the coronavirus crisis has exemplified the mission of his hedge fund.

"This environment is very much our environment," Mark Spitznagel said in an interview with Leslie Picker on "Squawk on the Street." "We are in a boom-and-bust cycle, an epic, monumental boom-bust cycle and this is really what a strategy like Universa's is here for."