Financial institutions, businesses and governments are interconnected in ways that are often hard to ascertain or measure. Leverage through the use of debt has become increasingly prevalent, and volatility has been artificially suppressed through central bank policies. Although markets are inherently susceptible to periods of instability, in the current global environment, unexpected and highly consequential negative market events, commonly referred to as "Black Swans", are more likely to occur. When extreme market risk does materialize, the impact is almost instantaneously transmitted from country to country. In this context, a significant financial crisis can be expected to affect all assets and regions.
Effective risk mitigation removes the need to make forecasting and timing decisions, like raising cash in anticipation of a market decline, that might ultimately prove wrong, whilst still permitting the capture of upside gains if markets continue to rise. A tail-hedged portfolio is thus not just robust to severe market declines but antifragile in that it benefits from volatility.
Lionscrest acts as an entry point to Universa Investments L.P. (“Universa”), an investment management firm that has specialized in risk mitigation since it was established in 2007 by Founder and Chief Investment Officer Mark Spitznagel. Spitznagel and Universa’s Distinguished Scientific Advisor, Nassim Nicholas Taleb, together began tail hedging formally for client portfolios over twenty years ago.
“The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.” - Benjamin Graham
“I am a strong believer that, if a risk mitigation strategy merely slashes a portfolio’s risk at a cost of growth of capital in that portfolio – even if it raised the “mean/variance” of that portfolio – then it was simply ineffective and probably not worth doing. After all, what was the point? A pensioner cannot eat “mean/variance”. The goal of risk mitigation must be to achieve the portfolio effect of raising the compound annual growth rate (CAGR), and thus wealth in the end user’s portfolio, by mitigating risk in that portfolio. This has always been our focus.” – Mark Spitznagel
“The mathematics of compounding: The big losses are essentially ALL that matter to your rate of compounding, not the small losses – and not even the big or small gains. The big losses literally destroy your geometric returns and, equivalently, your wealth.” – Mark Spitznagel