Renowned Hedge Fund Tycoon Reflects on the ‘Most Monumental Credit Bubble in Human History’

**A Practical Guide to Protecting Your Investment Portfolio**
**Understanding Tail-Risk Hedging: A Strategy for Protecting Your Investments**
When it comes to discussing the stock market and the economy, it’s not uncommon to face criticism. However, over the past year, I’ve noticed a change in the tone of correspondence from Fortune readers. They’re worried about the future of the U.S. economy and stock market, with concerns ranging from rising debts to commercial real estate troubles. Readers want to know how they, as average Americans and retail investors, can protect their portfolios. To find an answer to this question, I turned to Mark Spitznagel, the founder and chief investment officer of the private hedge fund Universa Investments, known for his expertise in tail-risk hedging.

**Tail-Risk Hedging: Protecting Against Unforeseeable Economic Catastrophes**
Spitznagel’s firm specializes in tail-risk hedging, a strategy that aims to prevent losses from unforeseen and improbable economic catastrophes, such as wars or pandemics, by purchasing derivative contracts that work like insurance. This strategy focuses on the left tail of a bell curve distribution of outcomes, where extremely unlikely but severe events occur—also known as black-swan events. Spitznagel, along with Nassim Taleb, who coined the term black swan, formulated this idea 25 years ago and became the pioneers of formal tail-risk hedging.

**The Importance of Long-Term Returns: A Cautionary Note on Safe-Haven Investing**
While retail investors often turn to safe-haven investments like gold, Treasurys, or the Swiss Franc in times of economic uncertainty, Spitznagel warns against relying solely on these strategies. According to him, if risk mitigation doesn’t support higher overall returns in the long term, it may not be worth it. Classic safe-haven strategies commonly used by retail investors often fall into this category. While there may be a looming recession or market downturn, Spitznagel believes that markets always bounce back, even from unexpected black-swan events. Instead of focusing on short-term protection, he encourages retail investors to heed Warren Buffett’s advice and concentrate on long-term wealth building while not betting against America.

**Learning from Mentorship: Everett Klipp and the Love to Lose Strategy**
Mark Spitznagel’s approach to investing was shaped by his mentor, Everett Klipp, a veteran corn and soybean trader. Klipp instilled in him the importance of disciplined trading and the value of taking small losses rather than risking it all on unpredictable market swings. Klipp’s philosophy of having an “attitude of gratitude” and embracing a “love to lose” strategy is the foundation of Spitznagel’s work today. Universa’s risk-mitigation strategy involves accepting small, steady losses over extended periods to afford insurance that pays off during stock market crashes.

**The Influence of Nassim Taleb: Black Swan Events and Unpredictable Outliers**
Nassim Taleb, a renowned financial mathematician and author, has had a significant impact on Spitznagel’s investment philosophy. Taleb’s book, “The Black Swan,” focuses on the impact of uncommon and unpredictable outlier events on economies and markets. Taleb serves as Universa’s distinguished scientific adviser and emphasizes the importance of preparing for the worst. Spitznagel and Taleb’s collaboration contributed to the development of Universa’s tail-risk hedging strategy, designed to generate explosive gains during market downturns through options strategies.

**Clarifying Misconceptions: Explosive Returns and Transparency**
Universa gained attention for its reported 4,144% return during the COVID-induced market downturn in 2020. However, Spitznagel clarifies that this figure stems from the hedges acquired to profit during market downturns, not the fund’s entire portfolio returns. It exemplifies Universa’s explosive tail-risk protection strategy, but it doesn’t imply an annual return of over 4,000%. Spitznagel emphasizes the importance of transparency and reveals that all clients have full access to their capital accounts. While Universa isn’t obligated to disclose its total portfolio returns, audited figures by EY show an impressive 105% average annual return on invested capital between January 1, 2008, and December 31, 2019.

**Conclusion: A Practical Approach to Protecting Investments**
Protecting an investment portfolio from worst-case scenarios requires a practical approach. While retail investors may feel the urge to turn to traditional safe-haven strategies, it’s essential to consider long-term returns. Instead of solely focusing on short-term protection, investors should adopt a mindset of disciplined trading and a willingness to accept small losses. By following the advice of mentors like Everett Klipp and heeding the wisdom of financial experts like Mark Spitznagel, retail investors can navigate uncertain economic landscapes while building long-term wealth.

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