Exclusive Part I Mark Spitznagel On Why Its Only A Matter Of Time Until The Next Crash [LETTER]

Fed critic who predicted previous 2 market crashes says timing can't be predicted, but causation can be determined

This is an in-depth 3 part series on Mark Spitznagel's Universa Investments fund. The series is based on interview tidbits and commentary from the hedge fund's 2017 letter to investors Stay tuned for more. Is Mark Spitznagel the most misunderstood hedge fund manager on “Wall Street?” The man ultimately responsible for decisions at Universa L.P., a tail risk mitigation strategy with nearly $6 billion under management, has been described as “betting on doomsday.” But in an exclusive ValueWalk interview, he opened up about a strategy that actually helps diversified portfolios in both up and down markets, slapping a strategy stereotype in the face. This Midwestern-born, Chicago-raised risk manager – a look that has been characterized as “boring” in a lecture given by author Malcolm Gladwell -- is the antithesis of a “boring” traditional 60% / 40% portfolio allocation between stocks and bonds.* While Wall Street’s long-only mindset might consider him as some anachronism, setting himself apart by finding a diversification method using bonds and distinctly claiming the emperor has no clothes. That's not boring. Challenging the prevailing thought process on a little island of thought, opening up new avenues for risk management, is exhilarating to Spitznagel. But once the nuanced dichotomy of what some consider revolutionary is understood – looking at the stock market opportunity lost by investing 40% of a portfolio into deep returning bonds – then the importance of end-point investing becomes apparent to volatility conscious investors near the end of an economic cycle. The dichotomies in today's mad world are apparent to those who actually seek real answers. How can Mark Spitznagel be best known for predicting the 2001 and 2008 market crashes but such brilliant analysis didn’t play any role in why his hedge fund delivered strong returns during such weak markets? Forecasting markets is fruitless, says the man who predicted the previous two. The dichotomy exists for the same reason the fund manager known deep in alternative investment circles for using a “long volatility” strategy also revealed that short volatility is no stranger to the portfolio. Market soothsaying has no impact on Universa’s day-to-day investment strategy, Spitznagel said with an important caveat. The 47-year-old fund manager pointed to his next prediction of a forthcoming markets crash, reiterating a theme. The man who predicted the previous two says he can't predict precisely when the market will get it, but that market price adjustment will happen, leading to a question. Can Spitznagel see core market causation for three market crashes in a row, something yet to be accomplished by any significant hedge fund manager? In this three-part series, we first take a look at Spitznagel’s economic theory to understand why he thinks the market will crash, then we explain how Universa’s strategy works and finally explore how his investment mind was shaped, leading to an uncommon approach that comes from a little-known sect deep inside what is generally considered “Wall Street.” Mark Spitznagel doesn’t have the look of a radical. His placid if almost "boring" Midwestern face belies a man with a strong spine and deep convictions to an investment philosophy that largely shuns the weak consensus. His current market view, which another market price adjustment is inevitable, coalesces with other voices that think excessive central bank interventionism will collapse under its weight. The “systematic mispricing of risk,” as author William Cohan recently called it in Vanity Fair, is documentable on several levels: sovereign bonds trade at negative real interest rates while stocks and junk bond values approach historical high valuations being among several concerns. While the opinion that the market is overvalued is not as novel as it...

Mark Melin

Mark Melin is an alternative investment practitioner whose specialty is recognizing the impact of beta market environment on a technical trading strategy. A portfolio and industry consultant, wrote or edited three books including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008) and taught a course at Northwestern University's executive education program.

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