Lionscrest and its Canadian partner HorizonsETFs arranged for Nassim Taleb to speak about risk management and antifragility in Vancouver on October 25 and Calgary on October 26 in front of over 1'000 professional investors.  Nassim was accompanied by his partners at Universa Investments who were on hand for discussions with prospective investors.

Nassim's speech focused on risk management and on describing the Antifragile: "things that gain strength from stressors and get stronger from failure". He made the following points:

• Fragile things shatter when stressed - Antifragile things benefit from stressors
• While risk is not truly measurable, fragility is
• To make things antifragile requires introducing stressors that thrive in periods of change and uncertainty
• To make portfolios antifragile requires introducing hedges that benefit from stressors

Lionscrest with its partner Universa Investments, the world's foremost expert on hedging tail-risk (Black Swans), and its Canadian partner Horizons ETFs, offer tail-hedging solutions that are antifragile.


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Bailey McCann, Opalesque New York

As Opalesque has reported in detail, tail-risk hedging has gained renewed interest from investors following the 2008 crisis. For those who invest in hedge funds, a variety of new products are being launched focusing on providing insurance for left tail, or 'black swan’ events. However, retail investors, which have many of the same risks, have found themselves without as many products to choose from. Earlier this year, Universa Investments, a California based hedge fund, which focuses specifically on tail risk, launched two ETF products through Horizons Exchange Traded Funds Inc. and its affiliate AlphaPro Management Inc which are now available to investors on the Toronto Stock Exchange.

Universa is an investment management firm that specializes in convex tail hedging and investing. Mark Spitznagel, its Chief Investment Officer, founded Universa in 2007 with over a decade of implementation and development of its focused, positive asymmetric investment approach. Universa's Senior Scientific Advisor, Dr. Nassim Nicholas Taleb, is considered the premier specialist of rare events (black swans) and has had a working relationship with Universa since its inception. Universa has approximately $6bn in assets under management.

Universa is known as one of the biggest, if not the biggest, players in the tail risk hedging space. The company has, in part, gained recognition through the work of Dr. Taleb, most notably his book The Black Swan and Dr. Taleb’s public appearances. Spitznagel is responsible for the bulk of the investing work of the company. The firm uses its Black Swan Protection Protocol (BSPP) to provide unique tail risk hedging solutions to its client base.

In essence, tail risk hedges, like those provided by Universa and other firms in the space are designed to pay investors when markets see significant shifts of at least 20% if not more to the downside. Typically, these hedges are crafted to match the needs and exposures of a given portfolio in order to achieve the desired coverage during an extreme downturn. For hedge fund investors, that may mean allocating a certain amount to a firm like Universa to manage left tail exposure during all types of market conditions, on the understanding that when things go down, that part of the portfolio will go up.

"In marrying the hedge with what it is hedging we can better express the edge. It's actually even more about opportunistic offense, having the ammunition to buy when everyone else is panic-selling, than defense," explains Spitznagel, in a conversation with Opalesque.

For retail investors the product is slightly altered in order to work within a retail portfolio. A portion of the ETF will be invested in the same Black Swan Protection Protocol offered to the firm’s hedge fund investors, while capturing the upside gains of the applicable stock index. As a result, the Black Swan ETF will have a slight drag relative to other ETFs accounting for the negative carry typically associated with tail risk hedges like the Protocol. However, during a black swan event, retail investors are likely to recapture some of that, just as a hedge fund investor would.

Investors that invest in the Black Swan ETF will also see any gains generated from Universa’s strategy reinvested into the stock portion of the portfolio on an opportunistic basis, explains Howard Atkinson, President & CEO of Horizons ETFs. He notes that so far, demand from investors for the product has been consistent, reflecting an global investor landscape that is still reeling from 2008.

While Universa had the first mover advantage, two other firms – First Trust and VelocityShares have also filed for their own black swan ETFs. The First Trust CBOE VIX Tail Hedge Index Fund tracks the CBOE S&P VIX Tail Hedge Index and equities on the S&P 500. The VelocityShares VelocityShares Tail Risk Hedged Large Cap ETF will track the VelocityShares Tail Risk Hedged Large Cap Index, according to SEC filings for both firms. Both of these products rely on a VIX based approach to tail risk hedging which diverges from what is believed to be an options based approach used in the Protocol. A detailed discussion of the differences between these two takes on tail risk is available in our recent series on tail risk hedges and funds.

The Universa ETF is available as the Horizons Universa Canadian Black Swan ETF, which has a combination of the Protocol and exposure to the S&P/TSX 60™, as well as the Horizons Universa US Black Swan ETF, which has a combination of the Protocol and exposure to the S&P 500. For the ETFs, Horizons acts as the investment manager while Universa is the sub-advisor. Both products are available on the Toronto Stock Exchange.

INTERVIEW BY BENJAMIN PAUKER
NOVEMBER 2012

Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. Born in Lebanon, he weathered the first few years of the civil war in the late 1970s reading philosophy and mathematics -- from Plato to Poincaré -- in his family's basement. War taught him how quickly fortunes can change, an insight he soon applied to derivatives markets. For Taleb, investing is about "hyper conservatism," which includes making lots of tiny bets on wildly unlikely events -- like a currency crisis or the banking collapse, on which he made tens of millions of dollars. His newest project is helping governments get smarter about risks, and his fervent anti-euro message has helped win him the ear of British Prime Minister David Cameron.

There are three categories of things: Fragile things that break, like the financial system; robust things that don't break easily but don't improve, like the Brooklyn Bridge; and my new category, "antifragile" things that gain strength from stressors and get stronger from failure, like evolution. The fundamental problem in foreign policy is that people shoot for stability rather than antifragility.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It's not even a city-state environment; it's a municipal state. Most decisions are made at the local level, which allows for distributed errors that don't adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe -- Switzerland. It's not united! It doesn't have a Brussels! It doesn't need one.

I just came back from Lebanon, which I feel is the most stable place in the whole area. Every risk is visible to the naked eye there; you can't be harmed by something like that. The homicide rate is much lower than that in the United States. The media says it's chaos -- but it's not. In the end, it's stable because Hezbollah and the Shiites know that they have to live with the Sunnis and the Christians. It can't fall apart because it's a perfectly controlled mess.

We need smaller, more decentralized government. On paper, it might appear much more efficient to be large -- to have economies of scale. But in reality, it's much more efficient to be small. An elephant is vastly more efficient, metabolically, than a mouse. It's the same for a megacity as opposed to a village. But an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it'll be fine. Size makes you fragile.

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

The U.S. government should have no deficit. There's way too much debt. It is inexcusable when you have the highest standards of living in the nation's history! When you get rich, you should have less debt. There's a vicious element to borrowing when you're very rich, and having a deficit is an extremely dangerous game.

I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader.