atans1

Bear makes money in bull mkt

In Financial competency on 08/12/2014 at 12:02 pm

Sure he underperforms S&P but it’s like being paid by an insurance co. to buy life insurance.

BEARISH FUND VS. THE BULLS STILL PROFITS The stock market has been rising for years, but Universa Investments, one of Wall Street’s most bearish investors, has found a way to make money anyway, Peter Eavis writes in DealBook. The hedge fund, founded by Mark Spitznagel, is set up with the aim of making money in an economic and financial collapse. Big pessimistic bets usually lose a lot of money when stocks are rising, as they have since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30 percent return last year, according to firm materials that were reviewed by The New York Times. The benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.

Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends. This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong ‒ and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview. The Universa strategy has produced gains of 10 percent this year, slightly less than the stock market overall. It’s been up every year since 2008, according to the materials.

Universa is not alone in saying that it can make money in good times and bad. Other firms also offer bearish bets that clients can use to hedge their stock portfolios. Such bets often cost so much that they have to be used sparingly. Yet Universa seems to be saying that its catastrophe insurance is comparatively cheap. The Universa marketing materials say that its strategy would theoretically result in a 16 percent gain if the S.&P. 500 fell 30 percent. For his part, Mr. Spitznagel is certain that another collapse will come.

  1. Spitznagel’s trading strategy is largely based on buying put options — the trick in bull markets is to screen for frothy companies with poor financials e.g. social networking stocks. Or even good companies trading at over-optimistic valuations in mature bull markets.

    However during prolonged strong bulls when the rising tide lifts all kinds of shit, this type of fund suffers. According to Bloomberg, Spitznagel lost -4% each in 2009 & 2010 when the S&P jerked up from the GFC. His discipline is in taking small losses — a skill he honed since he was a secondary school student trading on the CBOT.

    Btw, Nassim Taleb aka Black swan fame, is an old friend and is a special advisor to Spitz’s company.

    Btw2, another trading technique growing in popularity is the opposite — selling naked puts of solid companies with strong financials — to earn ongoing income targeting about 8% – 10% yield p.a.

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