China's SWF To Invest In Nassim Taleb's Bear Fund

It’s a pretty strong signal: China’s Sovereign-Wealth Fund is in talks with Black-Swan-author Nassim Taleb’s Hedge Fund, Universa’s Bearish Wagers, The Wall Street Journal reports. China is said to be willing to invest between 6 and 10 billion dollar in the fund that gives a payout of  60% if the market drops 20%. Some of the world’s biggest investors are planning to do the same.

“Stocks are not a robust investment. Make sure you have a garden that bears fruits.”

Nassim Nicolas Taleb


The famous author, philosopher and Wall Street trader, professor Nassim Nicholas Taleb was in his native northern Lebanon last week, thinking about instability in the pricing of goods and services. He suggests that investors around the world strap in for a wild ride of deflation and inflation. And says it therefore makes sense for him to pour money into farming, especially olives, which are indispensable to the Mediterranean world.


The mathematical finance scholar who lectures at New York University and wrote the 2007 book The Black Swansays he is as pessimistic as ever about the prospects for sustained global economic recovery.

He suggests that investors around the world strap in for a wild ride of deflation and inflation. And, therefore, he said, it makes sense for him to pour money into farming, especially olives, which are indispensable to the Mediterranean world, The Wall Street Journal writes.

“Healthy investments are those that produce goods that humans need to consume, not flat-screen TVs,” Mr. Taleb says over the phone from near his family’s ancestral home in Amioun.

“Stocks are not a robust investment. Make sure you have a garden that bears fruits.”

In For A Wild Ride

Nassim Nicholas Taleb also says investors around the world should strap in for a wild ride of deflation and inflation.

Some of the world’s biggest investors are planting the same seeds, according to WSJ.com.

The Santa Monica, Calif., investment firm Mr. Taleb helped start and still advises, Universa Investments LP, is in talks with China’s $300 billion sovereign-wealth fund, China Investment Corp., and Middle East government funds about investing in Universa, according to a person familiar with the matter.

Specifically, sovereign-wealth funds are willing to pay the firm in the hopes that if the market dives, at least some part of their portfolio will profit.

Panic is a profit-driver for Mr. Taleb, who has gained renown for his pessimism, a viewpoint that proved prescient in the market collapse of 2008.

The interest from the likes of the Chinese and Middle East funds, which control some of the world’s biggest pools of money, suggests more mainstream adoption of Universa’s bearish conviction.

The outcome of the talks isn’t certain, according to a person familiar with the matter.

But if the investments materialize, they likely would boost the Universa fund’s client assets from $6 billion to about $10 billion, two people familiar with the matter says.

CIC didn’t respond to a request for comment.

“Healthy investments are those that produce goods that humans need to consume, not flat-screen TVs. … Stocks are not a robust investment. Make sure you have a garden that bears fruits.”

Nassim Nicholas Taleb, author of  “The Black Swan”

The Black Swan Strategy

Mr. Taleb said he couldn’t discuss Universa client talks. But he has consulted with several sovereign-wealth funds about his “black swan” philosophy in recent years.

Such an approach represents an extreme downside hedge for China, whose export-heavy economy depends on global growth.

The term “black swan” refers to a long-held belief that all swans were white.

Explorers then discovered black swans in Australia.

The image came to reflect the occurrence of something highly unexpected, including events that could make markets nose-dive.

For investors wanting to guard against such events, Universa started the Black Swan Protection Protocol, a vehicle different from a typical hedge fund in that clients don’t hand over their entire account for the firm directly to manage.

Instead, clients designate a certain pool of assets, a notional value, that they seek to hedge, or protect against extreme losses.

For example, a client with a $100 million account with Universa would pay the firm a flat annual fee of 1.5% on that amount, or $1.5 million.

The client would transfer to Universa typically less than 10% to fund its account in the strategy.

Triple Profit If Market Drops

Universa is run by 39-year-old Mark Spitznagel, a former Chicago Board of Trade pit trader and longtime collaborator with Mr. Taleb.

His five traders buy put options on specific stocks and stock indexes.

The goal is for the value of the puts to pay off 60% if the market drops by 20% or more in a month. A put conveys the right to sell a security at a specified price.

This year, Universa clients on average have lost about 2% of their notional account value, one person familiar with the matter said.

This year’s volatility hasn’t been extreme enough, or its losses steep and sudden enough, for Universa’s strategy to pay off.

Universa’s clients also lost money last year, when the Standard & Poor’s 500-stock index gained 23%.

At year-end, client portfolios were down an average of about 4%, one person close to the matter says.

Mark Spitznagel, president and chief investment officer, Universa Investments.

But 2008 was different. That year, extreme market losses helped many Universa clients profit more than 100%.

Universa’s marketing pitch continues to be that something like 2008, or worse, will happen again.

Could Not Be More Negative

“We break even, or lose tiny amounts or have tiny returns, for a very long time, but we know it’s going to come,” Mr. Spitznagel says.

Mark Spitznagel

“I couldn’t possibly be more negative on the markets.”

Late last year, Mr. Spitznagel also launched a fund betting on a steep rise in inflation.

That fund, which has remained flat this year, suffered losses in recent months betting against Treasurys.

Government-bond returns are up about 8% since the start of the year, according to Bank of America Merrill Lynch Indexes.

“The biggest home run would be if we went into ’70s-style or worse inflation,” Mr. Spitznagel says.

“If I had a gun to my head, right now I’d fall on the deflation side, but that’s going to flip at some point.”

The Black Swan inflation strategy has less than $1 billion in client assets.

Clients might have to tolerate steady losses in order to reach a hoped-for bonanza.

In 2004, Messrs. Taleb and Spitznagel closed a previous fund, Empirica Capital, after two years of mediocre returns.

If the Black Swan Protection Protocol reaches $10 billion, Universa would make $150 million in management fees alone.

The firm also is entitled to 20% of profits, according to fund documents.

Meanwhile, Mr. Spitznagel has jumped into the farming life as well, buying a few hundred acres near Lake Michigan, where he has a vacation home. He is growing cherries and apples, and planning to raise goats.

Mr. Spitznagel calls it self-sustainability, which, he says, is another good hedge.

h/t: The Collector

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4 Comments

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4 responses to “China's SWF To Invest In Nassim Taleb's Bear Fund

  1. Pingback: Tweets that mention China’s SWF To Invest In Nassim Taleb’s Bear Fund « The Swapper -- Topsy.com

  2. The whole “black swan protocol” concept is marketing schtick.

    Yes they can happen, and yes of course some of your portfolio should always be safely shielded from true financial catastrophe, but really, that’s just basic common sense and it doesn’t require a separate “protocol” with 1.5% fees to achieve this.

    The hyping-up of a “Black Swan Protection Protocol” is pure scaremongering, designed to collect management fees for doing very little effort indeed. China already has a lot of money lying around earning very little; they may as well add a bit more…

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  4. Pingback: China’s Sovereign Wealth Fund To Invest In Nassim Taleb’s Bear Fund « Econotwist's Blog