NY Times - A Hedge Fund Manager Who Doesn’t Mind a Losing Bet

A Hedge Fund Manager Who Doesn’t Mind a Losing Bet (website)
By Alexandra Stevenson
New York Times
24 September, 2013

Meet Mark Spitznagel, the hedge fund manager who doesn’t mind a losing bet.

Mr. Spitznagel, the founder of Universa Investments, which has around $6 billion in assets under management, says the stock market is going to fall by at least 40 percent in one great market “purge.” Until then, he is paying for the option to short the market at just that point, losing money each time he does.

There is no shortage of market bears who take a grim view of the stock market. But Mr. Spitznagel has gained credibility in the investment world by predicting two market routs in the past decade, first in 2000 and then in 2008.

Still, Mr. Spitznagel’s approach is unusual for a money manager. To invest with him, you have to believe in a philosophy that is grounded in the Austrian school of economics (which originated in the late 19th century in Vienna). The Austrian school does not like government to meddle with any part of the economy: when it does, adherents argue, market distortions abound, creating opportunities for investors who can see them.

When those distortions are present, Austrian-school investors will position themselves to wait out any artificial effect on the market, ready to take advantage when prices readjust.

Mr. Spitznagel began his career buying and selling bonds in the trading pit at the Chicago Board of Trade in the 1980s. Everett Klipp, his boss and mentor at the time, encouraged him to take a “one-tick” loss to step out of a trade, rather than risking a 10-tick loss in hopes of a bigger profit.

“You’ve got to love to lose money, hate to make money,” was Mr. Klipp’s mantra.

In Mr. Spitznagel’s recently published book, “The Dao of Capital,” he applies this approach and his Austrian grounding to Chinese Daoist thought — the art of taking a circuitous path to an endpoint. Or, as Mr. Spitznagel says, “Learn to invest in loss.”

It’s a tough sell, considering hedge fund performance has routinely underperformed the Standard & Poor’s 500-stock index in recent years. (So far this month, for example, hedge funds are up 1.4 percent, trailing the 5.7 percent gain on the S.&P. 500, according to Bank of America Merrill Lynch’s Hedge Fund Monitor.)

“I don’t claim that everyone is knocking down my door,” Mr. Spitznagel said. “It’s a niche product. It always will be, I’m sure.” Universa has had losses so far this year, although Mr. Spitznagel would not be drawn into discussing the amounts. According to one person familiar with the firm, its funds are down around 2 percent this year.

“The only time it’s not a niche product is during or after a crash, but those are very brief moments,” Mr. Spitznagel said. Those moments — which in many people’s memories appear as financial Armageddons — are what he and his 15 or so investors, including institutional and sovereign wealth funds, patiently await.

In the 2008 financial crisis, Universa funds rose by as much as 115 percent as the S.& P. 500 plummeted. But that crisis is not over, Mr. Spitznagel said, and when the Federal Reserve stops its quantitative easing program of buying Treasuries, the market will have to readjust.

He is not alone in this view. Stanley Druckenmiller, a former strategist for George Soros and founder of Duquesne Capital Management, recently told Bloomberg TV that when the Fed begins to taper back its quantitative easing program, he expects the market will go down.

But Mr. Spitznagel goes further. “There needs to be a purge,” he said. “If there isn’t a purge, you don’t get the healthy growth. Capitalism is about loss and it’s about growth.”

It could be a long and career-testing wait for Mr. Spitznagel. Many of his theories come back to how the Fed acts. Since the financial crisis, it has spent more than $2 trillion trying to stimulate the economy. The Fed can keep spending as long as inflation stays low, hoping that eventually there will be a strong economic rebound.

But Mr. Spitznagel said that the central bank might find its policies stymied. Despite low interest rates, companies and individuals may pull back from borrowing, regardless of the Fed’s actions. In that situation, the economy would suffer and the markets tumble.

Until then, Universa’s investors will just have to wait patiently for the next Armageddon.

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