4,411% return. Black Swan? White Swan? Long-tail risk and CalPERS
Nassim Taleb in the New Yorker describes how this pandemic is not a Black Swan but a White Swan, because it was predictable. He predicted it. And so did Bill Gates and others.
Mark Spitznagel, the head of Universa Investments, is Nassim Taleb's long-time friend and mentee, explains his hedge fund thesis and performance, including a particular called "Black Swan Protection protocol"
Spitznagel has built a career feasting on traders’ greed—prioritizing quick gains over prudent risk taking. To earn these easy gains, traders readily assume “tail risks” or huge but extremely remote potential losses. Eventually, someone gets caught. When a financial panic, or an unexpected event like the coronavirus surfaces, Spitznagel’s firm converts from what once looked like charity into a financial powerhouse that’s fully stocked with valuable hedges. Then Spitznagel caters to traders' new immediate demand, which is fear.
Universa’s flagship “Black Swan Protection Protocol” fund earned its near two dozen institutional investors a staggering 3,612% in March, putting its 2020 gains at 4,144%. From his remote farm, on April 7, Spitznagel fires off an update to his investors that is soon read worldwide. “These returns likely surpass any other investment that you can think of over the period you have been invested with us,” he crowed. “Kudos to you for such a sound “tactical” allocation to Universa.” Universa Investment Q1 Shareholder letter.
Nice. But, if it wasn't a Black Swan event, why did the Black Swan Fund perform perfectly?
Where does CalPERS come into this? Follow closely:
So CalPERS, or the California Public Employees’ Retirement System, has $360B assets under management and is the largest pension fund in America. Unfortunately, it's underfunded. How much? $153B, only 68 percent of the assets it should have. Yikes.
Well, the CIO of CalPERS decided to wind down or remove their investment in Universa in January, so the fund lost out on what should have been a $1B payout to CalPERS as the rest of the market collapsed. What adds real fire to the incident is that the CIO, Ben Meng, gave a pretty misleading non-answer to a question posed by a board member. Read below:
Margaret Brown, an all-member representative for CalPERS, posted on her Facebook page on Thursday that the board was never told about the elimination of one of two tail-hedge strategies, which are designed to protect portfolios against market crashes. And meeting minutes show that Brown asked CalPERS CIO Ben Meng about the strategy at the pension’s March meeting.
“Ben, can you tell me how our left-tail investments are performing?” Brown asked, according to the meeting minutes. “Are they performing the way we thought they would in this economic downturn?”
In response, Meng said: “Yes, for any left-tail risk hedging strategy you're referring to, they should perform well in this kind of a down market, as they were exactly designed to do. And from what we know are most of these strategies are performing as anticipated.”
On Facebook, Brown pointed out that Meng failed to mention at the time that the pension had already unwound those positions.
Do you think this bodes well for pensions around America?