Black Swan Inflation Fund Rises on Commodities Trading

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Thanks to commodities hoarding, the Black Swan inflation fund was up nearly 9 percent for the first quarter, according to a letter from its chief investor, Mark Spitznagel, that has been obtained by CNBC.

The Black Swan Protection Protocol—Inflation fund was up 2 percent for the month of March and 8.8 percent for the first quarter, according to the letter, on notional investments that people familiar with the matter pinpoint at about $6 billion.

Unlike typical hedge funds, which raise and manage a pool of money known as “assets under management,” the Santa Monica, Calif. based Universa manages a large pool of client portfolios for which it hedges just a fraction of each client’s total assets. It keeps an unusually large percentage of its assets in cash and cash equivalents. The idea is to provide clients protections against extreme market movements.

Universa has shot to fame partly because of its affiliation with investor Nassim Nicholas Taleb, whose prescient 2007 book “The Black Swan” described how unanticipated, extreme negative events could impact financial markets. Taleb, who has been working with Spitznagel for a decade, is Universa’s senior scientific advisor.

The Universa letter attributes its strong quarterly performance to “its very convex exposure”— ie, options trades—on “crude oil, grains, coffee, and silver.” The only negative returns, it adds, “came exclusively from its Treasury position.”

In an interview, Spitznagel said that the inflation fund’s formula for success this year has been fairly straightforward.

“The instability in the commodity markets is quite obvious,” he said.

Mark Spitznagel
Photo: Susan Hall
Mark Spitznagel

“We have this cross-sectional, convex exposure to that. All commodities don’t have to freak out, but if one does, we’re likely to do extremely well.”

So while the huge runups in crude, silver, and coffee were beneficial (wheat got much choppier toward the end of March), only one big performer would have done the trick.

The first-quarter performance is one of the fund’s best since it opened in 2009. But returns would have been further juiced had Universa hedged the Nikkei—which, because the trade wasn’t required in order to hedge any of the firm’s individual client’s portfolios, it did not.

Other tail-risk hedge funds fared less well. Pine River Capital, for instance, which opened its fund about a year ago with $200 million in assets, is down roughly 5 percent for the first quarter, according to two people familiar with the performance. To be fair, however, many tail-risk funds are designed to lose money during normal times, since insurance and options carry a cost. (They’re there for when the market goes haywire and an investor needs that insurance.) Universa’s other fund, the Black Swan Protection Protocol protected equity portfolio—dubbed the “crash fund” during the financial crisis—is up about 4.7 percent year to date, according to the firm’s letter. “We have the luxury in all of our products to be agnostic in our positioning with respect to any macro views,” the letter adds, “and this remains the case despite the evidence of a highly overvalued US stock market and perhaps a near tipping point in inflation.”

In the interview, Spitznagel hammered this point even harder.

“I would argue that our stock market is as overvalued right now as it’s been at any time since 1900—except for the late 1990s,” he said, adding that his strong hunch is that domestic inflation is being underreported by the government.


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