Wednesday, 26 November 2014

A Bearish Hedge Fund Bets Against the Bulls and Still Profits

By Peter Eavis

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period?

Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns.

Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever 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. In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.

Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again.

At Universa, 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...

Continue reading the article here.