Mark Spitznagel

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Mark Spitznagel

Mark Spitznagel at his place in Northport Point, Mich. (The Wall Street Journal, June 17, 2009,[1] August 24, 2010[2])
Born March 5, 1971 (1971-03-05) (age 40)
Michigan[3]
Residence Los Angeles, California and Northport Point, Michigan
Alma mater New York University[3] (postgrad)
Occupation Hedge Fund Manager

Mark Spitznagel (born March 5, 1971) is an American hedge fund manager, value investor, and derivatives trader.

Spitznagel is known for his bearish value- and derivatives-based stock market investing, such as his hugely profitable billion dollar derivatives bet on the stock market crash of 2008[1][4][5][6][7][8] (which made him easily one of the top performing investors of the financial crisis, and among The Wall Street Journal's list of the “5 hedge-fund managers to watch of Wall Street’s biggest, boldest investors”[9]).

Spitznagel is the founder, owner, and Chief Investment Officer of the hedge fund management company Universa Investments, L.P., based in Southern California.[1][5][6][8][10][11][12][13][14] Universa has approximately $6 billion under management.[1][2][6][8][12][14][15] Spitznagel reportedly has large Chinese and Middle Eastern sovereign wealth funds among his investment partners,[2] and he has since closed his funds to new investors.[1][14]

Prior to hedge fund manager, Spitznagel has been an independent pit-trader at the Chicago Board of Trade[1][2][5][6][8][11][13] and the head of equity options in a secretive proprietary trading group at Morgan Stanley in New York[6][13] (until they requested that he sign a stringent “noncompete” agreement[1]). Spitznagel has an M.S. in Mathematics from the Courant Institute of Mathematical Sciences at New York University and a B.A. from Kalamazoo College in Michigan.[3][13]

Contents

[edit] Financial crisis, 2008–2010

In 2008, Spitznagel's Universa funds scored returns of over 100% as the Standard & Poor's 500-stock index lost over a third of its value during the global financial meltdown,[1][2][5][6][8][12][14][15][16][17] making him “a fortune” according to The Wall Street Journal.[1] Universa lost back about 4% in 2009 and 2010 when the S&P 500 recovered by over 40%.[2][5][6] Despite this superior aggregate performance, Spitznagel has commented that, since it was “done in a very lumpy way, for the most part, it's not very compelling.”[6]

The Wall Street Journal alleged that a large purchase of put options by Universa in the minutes leading up to the May 6, 2010 “flash crash” (when the Dow lost over 9% of its value during the day) was among its primary triggers[18][19] (and for which Spitznagel was subpoenaed by the U.S. Securities and Exchange Commission[6]).

Since his very timely 2008 market call in his private funds, Spitznagel has made similarly timed market calls. In July 2009, Spitznagel opened a fund betting on inflation[1][2][14]—with a Wall Street Journal front-page headline reporting “Spitznagel Bets Reputation on Inflation”[1] (after which the price of Gold approximately doubled over the next two years, and Spitznagel's fund made 20% annual gains[7]). In June 2011, CNBC reported on a research piece by Spitznagel (The Dao of Corporate Finance[20]) which predicted a 20-40% correction in the S&P 500 stock index, based on “stock valuations (specifically the Q ratio) put in the context of 110 years of stock-market history”[21] (and the S&P 500 subsequently lost almost 20% within four months, as Spitznagel's funds reaped from 20% to up to 10-fold gains[4][22]).

[edit] Value Investor

Spitznagel is an adherent of the value investing philosophy, quoted as saying “I'm a value investor in my bones”[5] and calling Benjamin Graham (whom he also hailed in a Wall Street Journal op-ed[23]) “the most significant thinker in investing. His margin-of-safety principle is central to the practice—certainly to my practice.”[7] “My whole investment methodology can be summed up as convexity,” he has said, which “underpins the intellectual humility and margin of safety of value investing.”[7] More specifically, he claims to “focus on sensitivities of stock prices to changes in their key value drivers.”[7] Spitznagel has even likened his esoteric derivatives trading to value investing due to his emphasis on long-term expected intrinsic value over short-term market swings.[6]

Spitznagel has become notorious for very concentrated bearish bets in his so-called “tail-hedging” funds[1][5][6][8][12][14][15][16][17][18] (what some have called “doomsday” investing,[24] and for which, according to Forbes, he has many “copycat” followers[25]). He is presumed to employ positions such as out-of-the-money puts on overvalued equities[1][2][5][7][8] (for example, Lehman Brothers,[26] about which he has responded “It's a regrettable aspect of our trade that we tend to do very well on others' misfortune”[27]).

Ironically, he sees his bearish strategy as primarily a value-driven bullish play on cheapened markets. With the capital he generates in a crash, his investors can “invest like Warren Buffett just when asset prices are depressed.”[7]

Key to Spitznagel's highly unconventional (even self-described as “bizarre”) investment style is his intention to underperform and even lose the majority of the time[3] (which he calls “time arbitrage”[28]). This approach requires “focus and discipline in the face of lumpy returns,” he says, which “ultimately keeps away competitors—they always move to greener pastures.”[6]

Forbes has described Spitznagel's investment strategy as “bets on the fat tails…delivering a string of mediocre results interrupted occasionally by spectacular years.”[29]

Spitznagel's self-described operating principle is from the Daoist philosopher Laozi: “The hard and stiff will be broken, the soft and supple will prevail.”[3] “The mental model I've always had has been to yield to the market forces like the supple tree,”[7] he has said. “I want to be resilient when I’m wrong, to embrace errors in parameters, and even benefit from them; I don’t want to fear them.”[3]

Bloomberg reported in 2011 that Spitznagel seeded his family office with $100 million.[5]

[edit] Austrian School economist

Spitznagel has become one of the more vocal and prominent proponents of the Austrian School of economics (and a harsh critic of Federal Reserve monetary policy and Keynesianism).

In a series of Wall Street Journal op-eds, Spitznagel extolled the views of Ludwig von Mises against government-induced inflationary credit expansion (“Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into…a brittle one.”)[30] and criticized the interventionism of Federal Reserve chairman Ben Bernanke (“easily the most significant market manipulator in history”) as the ultimate cause of economic malaise.[23][31][32]

Specifically, in his article “Christmas Trees and the Logic of Growth”, Spitznagel made an analogy of the lessons learned from previous wildfire suppression policy in Yellowstone Park (the “Yellowstone Effect”) to the Fed's bailout and crash-suppression policies (and resulting malinvestment).[31]

Spitznagel has similarly advanced Mises's (and Eugen Böhm von Bawerk's) concept of time preference as well as lauded the free-market views of Ayn Rand (who, according to Spitznagel, “perhaps better than any economic observer, underscored the central role of incentives in driving entrepreneurial innovation and risk-taking. Whittle away at incentives—and at the market’s ability to communicate them through price signals—and you starve the growth engine of its fuel.”).[33]

[edit] Chicago pit trader

Spitznagel's approach to investing dates to his time as a fledgling pit trader in the early 1990s in the bond futures pit at the Chicago Board of Trade.[5][6] There, as the youngest trader in the bond pit,[13] he was mentored by 50-year veteran corn and soybean trader Everett Klipp (a.k.a. the “Babe Ruth of the Chicago Board of Trade”).[1][3][5][34][35] According to Spitznagel, Klipp “stood with me in the bond pit and told and showed me the importance of discipline in trading—the discipline to limit losses and control risks and not try to forecast the market.[35] I was pretty much brainwashed by the age of 16 by this old grain trader who said that to be successful, you just had to know how to take a small loss as opposed to a big loss.”[6]

[edit] Black Swan Theory

Spitznagel's bearish “tail-hedging strategy” (named the “Black Swan Protection” fund)[6][8] is related to the Black Swan Theory and Problem of Induction of David Hume, Karl Popper, et al., and highly popularized by author and financial mathematician Nassim Nicholas Taleb.[9] Spitznagel and Taleb are long-time close collaborators,[14] going back to Spitznagel's graduate study at the New York University Courant Institute of Mathematical Sciences where Taleb was a professor.[6][13][36][37] Together in 1999, as partners at hedge fund Empirica Capital in Greenwich and New York, Spitznagel and Taleb created the first ever tail-hedging fund[7][13][36][37] (a concept which has since gone on to become a major hedge fund investment asset class[7][24]). Taleb has said “One thing Mark taught me was that when someone isn't afraid of losing small amounts, they're almost invincible.”[1] Regarding their later relationship at Spitznagel's hedge fund Universa, Taleb has called himself “in general a risk adviser to Universa, I don't know their positions, I'm not involved in trading.”[38].

[edit] Personal

Spitznagel keeps homes in Los Angeles's wealthy East Gate Bel Air neighborhood (in an estate which he bought in 2009 from Jennifer Lopez and Marc Anthony) and in Northport Point, Michigan.[5][7][39] He also owns a cherry farm and goat dairy in Michigan.[2][5][7][24]

According to Malcolm Gladwell (in The New Yorker and What the Dog Saw), “Spitznagel is blond and from the Midwest and does yoga. He exudes a certain laconic levelheadedness,” and “wants to be like von Karajan.”[36][37] Bloomberg described Spitznagel honing his investing discipline with weekly training in Chinese Chen-style taijiquan, dodging oncoming taxicabs while skateboarding in New York's Central Park, and piloting engineless sailplanes over California’s Sierra Nevada mountains[5] (which he since gave up for his instrument-rated pilot's license[7]). Forbes described the “unruffled”, loafered Spitznagel as looking “better prepared for a yacht race than for doomsday.”[28]

[edit] Publications

[edit] References

  1. ^ a b c d e f g h i j k l m n o Spitznagel Bets Reputation on Inflation, The Wall Street Journal, June 17, 2009
  2. ^ a b c d e f g h i Taleb's Pessimism Lures CIC, The Wall Street Journal, August 24, 2010
  3. ^ a b c d e f g The Secret to Mark Spitznagel's Success? Not Following the Crowd, CIMS Newsletter, Fall/Winter, 2009
  4. ^ a b Hedging against disaster even as markets grow calm, Reuters, January 27, 2012
  5. ^ a b c d e f g h i j k l m n When Black Swans Fly, Bloomberg Markets, November, 2011
  6. ^ a b c d e f g h i j k l m n o p Profiting from Disaster, Risk magazine, January, 2011
  7. ^ a b c d e f g h i j k l m Spreading his wings, Absolute Return + Alpha, November, 2011
  8. ^ a b c d e f g h October Pain Was ‘Black Swan’ Gain, The Wall Street Journal, November 4, 2008
  9. ^ a b 5 hedge-fund managers to watch in 2012: How to gain market insight from Wall Street’s biggest, boldest investors, MarketWatch Wall Street Journal, December 23, 2011
  10. ^ Mr. Volatility and the Swan, The Wall Street Journal, July 13, 2007
  11. ^ a b Flight of the Black Swan, Bloomberg Markets, May, 2008
  12. ^ a b c d Taleb's `Black Swan' Investors Post Gains as Markets Take Dive, Bloomberg, October 14, 2008
  13. ^ a b c d e f g Universa Investments L.P., firm website
  14. ^ a b c d e f g Black Swan Fund Makes a Big Bet on Inflation, The Wall Street Journal, June 1, 2009
  15. ^ a b c Preparing for the Next 'Black Swan', The Wall Street Journal, August 21, 2010
  16. ^ a b Black Swan Bets, Forbes, January 15, 2009
  17. ^ a b The Stars of The Recession, Newsweek, January 19, 2009
  18. ^ a b Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?, The Wall Street Journal, May 11, 2010
  19. ^ Chicago fires back over stocks sell-off blame, Reuters, May 11, 2010
  20. ^ Special Research from Universa Investments L.P., research section on firm website
  21. ^ Black Swan: A 40 Percent Correction?, CNBC.com, June 16, 2011
  22. ^ Universa, Pimco Posted Gains on Black-Swan Funds as Market Fell, Bloomberg, August 10, 2011
  23. ^ a b Spitznagel, All About the Benjamins, The Wall Street Journal, March 30, 2011
  24. ^ a b c New Investment Strategy: Preparing for End Times, The New York Times, June 29, 2011
  25. ^ Wall Street's Black Swan Copycats, Forbes, June 8, 2011
  26. ^ DealBook, The New York Times, January 29, 2009
  27. ^ Overheard, The Wall Street Journal, February 14, 2009
  28. ^ a b Protect Your Tail, Forbes, June 27, 2011
  29. ^ The Oracle of Doom, Forbes, February 2, 2009
  30. ^ Spitznagel, The Man Who Predicted the Depression, The Wall Street Journal, November 7, 2009
  31. ^ a b Spitznagel, Christmas Trees and the Logic of Growth, The Wall Street Journal, December 23, 2011
  32. ^ Spitznagel, The Fed and the May 6 'Flash Crash', The Wall Street Journal, May 28, 2010
  33. ^ Spitznagel, Capital Shrugged, Project Syndicate, February 16, 2012
  34. ^ Everett Klipp: 'Babe Ruth of the CBOT', Futures Magazine, May 1, 1999
  35. ^ a b Veteran Trader of the Chicago Board of Trade, Chicago Tribune, January 31, 2011
  36. ^ a b c Malcolm Gladwell, Blowing Up, The New Yorker, April 29, 2002
  37. ^ a b c Malcolm Gladwell, What the Dog Saw: And Other Adventures. Little, Brown and Company. 2009
  38. ^ 'Black Swan' Author Denies Role in Market Meltdown, CNBC.com, May 12, 2010
  39. ^ J-Lo and Marc Anthony Sell In Los Angeles to Financier, The Wall Street Journal, January 8, 2010
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