Leaked letter: The 'Black Swan' fund that raked in a 4,000% return last quarter warns a bigger crash is coming

Theron Mohamed

Apr 10, 2020, 16:06 IST

Leaked letter: The 'Black Swan' fund that raked in a 4,000% return last quarter warns a bigger crash is coming

Reuters/China Photos

The "Black Swan" hedge fund that raked in a 4,144% return last quarter warned its clients this week of a bigger crash to come.
"The world remains very much trapped in the mother of all global financial bubbles," Mark Spitznagel, the chief of Universa Investments, said in a letter to investors obtained by Business Insider.
"If the pandemic doesn't pop this bubble then, of course, it will be something else that eventually accomplishes this," he added. "This is far from over."
Spitznagel said that he doesn't know when the bubble will pop: "There are no magic crystal balls!"
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The "Black Swan" hedge fund that raked in an astounding 4,144% return last quarter warned its investors that the coronavirus sell-off was just a small taste of what's to come.

"The world remains very much trapped in the mother of all global financial bubbles," Mark Spitznagel, the boss of Universa Investments, said in a letter to clients shared with Business Insider by the Milton Financial Market Research Institute.

"If the pandemic doesn't pop this bubble then, of course, it will be something else that eventually accomplishes this," he continued. "This is far from over."

Spitznagel is a protégé of Nassim Taleb, the author of "The Black Swan: The Impact of the Highly Improbable." Universa, which counts Taleb as a scientific advisor, prepares for extreme market swings by buying "out-of-the-money" options that pay off if prices move dramatically.

In the letter, Spitznagel cautioned that the global economy is barreling towards a bigger crash, fueled by trillions of dollars in stimulus measures, rock-bottom interest rates, and a flood of money into markets.

"Make no mistake, it's the systemic vulnerabilities created by this unprecedented central-bank-fueled bubble, and the crazy, naïve risk-taking and leverage that accompanies it, that makes this pandemic so potentially destructive to the financial markets and the economy," he said.

He continued: "The powers that be are likely running out of ways to keep the bubble inflated."

Universa didn't immediately respond to a request for comment from Business Insider.

Predicting the future

Spitznagel teased his investors with a promise to "share with you exactly what my trusty crystal ball is saying right now," only to exclaim later in the letter, "There are no magic crystal balls!"

He also dismissed any suggestion that the coronavirus was a so-called "black swan" or surprise shock that only clairvoyants could have anticipated.

"The global pandemic risks were there for all to see," he said, pointing to Taleb's warning about the threat in his famous book "The Black Swan" more than a decade ago.

"It's more like carrying an umbrella"

Spitznagel pitched his fund as a tool to enable risk rather than eliminate it.

"Think of Universa as your safe haven, your shelter from the unpredictable storm," he said in the letter. "But it's not like staying holed up safely indoors (quarantined, as it were) whenever dark clouds gather."

"It's more like carrying an umbrella, allowing us to go about our business, rain or shine, no matter what financial storms loom," he continued.

At least partly protected if the heavens open, Universa's investors can expose themselves to riskier assets and "ride the market bubble," Spitznagel added, "without the need for a crystal ball."