Universa Investments

[Gregmal]

This is all great and sounds cool, but what these guys do is effectively gamble away the entirety of your allocation with the hope that under certain circumstances, their wagers will result in a big windfall. Peronsally, I'd love to have a job where the expected outcome is that I lose all of your money, with no consequence. Actually scratch that.... with the expectation that next year you will give me more to do the exact same thing....

 

Why do these guys get so loudmouthed and boisterous during times where they hit? Because these schemes revolve around marketing.

[SHDL]

Peronsally, I'd love to have a job where the expected outcome is that I lose all of your money, with no consequence. Actually scratch that.... with the expectation that next year you will give me more to do the exact same thing....

 

Sounds like you might want to start a competing shop...

 

Now I’m half joking but half serious too. This fund seems like a really great niche business. Clearly differentiated product vs other investment funds, eye popping bear market returns that volatility averse institutions will salivate over, nobody seems to really know what exactly they do, difficult for potential competitors to establish credibility because big crashes don’t come very often, .... I fully expect them to be wildly profitable given these business characteristics.

[Kaegi2011]

This is all great and sounds cool, but what these guys do is effectively gamble away the entirety of your allocation with the hope that under certain circumstances, their wagers will result in a big windfall. Peronsally, I'd love to have a job where the expected outcome is that I lose all of your money, with no consequence. Actually scratch that.... with the expectation that next year you will give me more to do the exact same thing....

 

Why do these guys get so loudmouthed and boisterous during times where they hit? Because these schemes revolve around marketing.

 

Well isn’t this the point of insurance?  You hope you don’t need it but it works well when shit hits the fan?  A 30x return pays for a lot of years of complete donuts.

[scorpioncapital]

Actually if you look at their presentations they are long Sp500 with like 97% or so and 3% to Universa. That 3% dynamite does so well that the total return exceeds SP500 , and more importantly with much lower drawdown since in a crash it tends to skyrocket.

[stahleyp]

Yeah, I like these guys.

 

They have a differentiated product, they seem to be pretty honest (for a financial services company anyway) about what it does and doesn't do. There is a real value (protection) to what other places offer (beating the market...but failing to do so).

 

Will it beat the index over the long term? Probably not. If we go through Great Depression II, will its investors probably be pretty happy? Yes.

[Kaegi2011]

Will it beat the index over the long term? Probably not.

 

Have you read their research?  If so, and you disagree with their figures / outcome, can you explain why? 

[Gregmal]

Will it beat the index over the long term? Probably not.

 

Have you read their research?  If so, and you disagree with their figures / outcome, can you explain why?

 

Everyone has their research and everyone makes bold claims. Motley Fool beats the shit out of the market too apparently. Financial Services firm research is mostly bs. Especially stuff done only for accredited investors.

 

I'd even point out that unless they have additional disclosures, spamming Twitter like they were doing not long ago is a major no-no in the business as well. I think since they only market to exempt participants, they can get away with it, but its definitely sketchy.

[stahleyp]

Will it beat the index over the long term? Probably not.

 

Have you read their research?  If so, and you disagree with their figures / outcome, can you explain why?

 

Not sure what you mean by whether I disagree with their outcome or not. If you are basing the value of an "insurance policy" on the date right after the loss, of course it'll outperform. Over time, the amount you pay for insurance is not usually a profitable investment.

 

 

 

[Kaegi2011]

Will it beat the index over the long term? Probably not.

 

Have you read their research?  If so, and you disagree with their figures / outcome, can you explain why?

 

Everyone has their research and everyone makes bold claims. Motley Fool beats the shit out of the market too apparently. Financial Services firm research is mostly bs. Especially stuff done only for accredited investors.

 

I'd even point out that unless they have additional disclosures, spamming Twitter like they were doing not long ago is a major no-no in the business as well. I think since they only market to exempt participants, they can get away with it, but its definitely sketchy.

 

I'm sorry I'm missing specifically what it is about their strategy that you disagree with?  Or are you suggesting that they're just straight up lying about their performance in that very specific account letter?

[Kaegi2011]

Will it beat the index over the long term? Probably not.

 

Have you read their research?  If so, and you disagree with their figures / outcome, can you explain why?

 

Not sure what you mean by whether I disagree with their outcome or not. If you are basing the value of an "insurance policy" on the date right after the loss, of course it'll outperform. Over time, the amount you pay for insurance is not usually a profitable investment.

 

But you're speaking in generalities.  For you to invest in their strategy you have to believe that protection pricing is improperly priced.  Based on events over the past twenty years (tech bubble, GFC, and now this), we've had more than a few 20 sigma events.  B/c if you believe that their 34x return is correct, a 3% allocation means they can go 11 years without making any profit to break even, and they're providing you cash at the most opportune moment (E.g., a crash) to compound. 

 

So again, is there anything specific that you disagree with? 

[stahleyp]

Here's what I agree with: a strategy without their product will outperform over the long term (100% S&P 500 vs 97% and 3% their product). Their product is beneficial for some investors (those that don't like large drawdowns). I like the fund and think it has a place in some portfolios. Personally, if I had to chose either 100% stocks or their with their allocation or without for life, I would chose without.

 

You shouldn't look at their strategy as of March 2020 and say "well, look, this thing outperformed just a straight index!". Of course it did after a huge drawdown. That's the perfect time to sell this stuff.  If you looked a month before then, it was probably trailing by 3% per year (perhaps more) since inception.

 

Like I said, the vast majority of people will pay way, way more for insurance than what they get. The same can be said for this. However, the peace of mind does have real value.

[Kaegi2011]

Here's what I agree with: a strategy without their product will outperform over the long term (100% S&P 500 vs 97% and 3% their product). Their product is beneficial for some investors (those that don't like large drawdowns). I like the fund and think it has a place in some portfolios. Personally, if I had to chose either 100% stocks or their with their allocation or without for life, I would chose without.

 

You shouldn't look at their strategy as of March 2020 and say "well, look, this thing outperformed just a straight index!". Of course it did after a huge drawdown. That's the perfect time to sell this stuff.  If you looked a month before then, it was probably trailing by 3% per year (perhaps more) since inception.

 

Like I said, the vast majority of people will pay way, way more for insurance than what they get. The same can be said for this. However, the peace of mind does have real value.

 

So far you've simply stated your opinion, and if you want to believe that it's fine.  I'm not trying to argue about your opinions.  But that opinion does not hold water against actual performance in the documents shared above.  So you have pretty much the following arguments:

 

1) You the think the numbers are inaccurate and does not reflect actual performance (again, they only take institutional money with minimum account sizes of greater than $150mm, so I don't think this is realistic, but it's possible - maybe it's another Madoff, and if you have suspicion I'd love to hear the logic...)

2) You don't think the market pricing for selling protection going forward will be as friendly going forward, and pricing of these products will go way up to reflect actual risk (certainly possible, maybe even expected, but I would have thought the same after GFC, so would be curious to hear why you think this)

3) You don't think markets will decline going forward

4) Some combination of 2/3 above

 

Below are the relevant paragraphs where I'm wondering if you've read the letter...

 

"A 3.33% portfolio allocation of capital to Universa’s tail hedge added 12.7% to the return of an SPX portfolio in March 2020, added 11.6% to the CAGR of an SPX portfolio since 2019, added 1.7% to the CAGR since 2015, and added 3.6% to the CAGR life-to-date (since its inception in March 2008). The Universa risk mitigated portfolio has thus outperformed the SPX across all of these timeframes, accompanied by—or, more accurately, because of—far less risk (as evidenced by the March 2020 and the 2008 columns)."

 

And, to answer the persistent skeptics of our strategy out there, let me point out that we certainly didn’t need the Q1 2020 market drop to add risk mitigation value. At the end of 2019, for instance, Universa’s life-to-date risk mitigated portfolio CAGR exceeded the CAGRs of all of the other risk-mitigated portfolios (including, most notably, high-duration bonds), as well as of the SPX alone, by from 2.2% to 4.2%."

 

[stahleyp]

I'll say that I was probably wrong with the inception numbers (I haven't read all of their writings). With that said, I don't know how fair it to look at inception near the start of the Great Recession. I say that's more luck than skill.

 

What were the performance figures from say Feb 2010-Feb 2020?

 

 

 

[Kaegi2011]

I'll say that I was probably wrong with the inception numbers (I haven't read all of their writings). With that said, I don't know how fair it to look at inception near the start of the Great Recession. I say that's more luck than skill.

 

What were the performance figures from say Feb 2010-Feb 2020?

 

I don't know their performance from Feb 2010 to Feb 2020.  Implicit in that question is what happens when there are no major drawdowns - I would assume it's not very favorable.  But that goes into the bucket #3 that I mentioned above - which is that you don't think significant drawdowns will occur in the future and therefore insurance is not worth buying as it'll never pay off.  Of course if that's your view then there's no reason to buy insurance. 

[stahleyp]

I'll say that I was probably wrong with the inception numbers (I haven't read all of their writings). With that said, I don't know how fair it to look at inception near the start of the Great Recession. I say that's more luck than skill.

 

What were the performance figures from say Feb 2010-Feb 2020?

 

I don't know their performance from Feb 2010 to Feb 2020.  Implicit in that question is what happens when there are no major drawdowns - I would assume it's not very favorable.  But that goes into the bucket #3 that I mentioned above - which is that you don't think significant drawdowns will occur in the future and therefore insurance is not worth buying as it'll never pay off.  Of course if that's your view then there's no reason to buy insurance.

 

I have no reason that it pays off in the long run. If you would have bought this in 1980-2000, you would probably be way less well off. The only big event that it would have probably made a ton on was the crash in 1987. It's not fair to say "well, if you would have invested in our product right before the Great Recession and held until the end of 2019 you would have outperformed the S&P 500!" That's probably true but there is a huge luck factor in that too. What if they started the fund in 1995? 1990?

 

Like I said, I think the fund has a real value (much more so than the vast, vast majority of funds/managers). I don't think a hedged portfolio will outperform an unhedged over a very long period of time.  If this virus didn't happen, we wouldn't be talking about the fund right now either.

[Kaegi2011]

If this virus didn't happen, we wouldn't be talking about the fund right now either.

 

You're right, we would not.  But if one had invested with the at the beginning, that portfolio is still likely to outperform the S&P, but then you're saying it's luck and not skill.  Fair enough - not for you. 

 

Maybe we can get back to the topic of whether there are potential instruments to use for the future, or the relative merits of those. 

 

For HYG/LQD - they seem to be far less sensitive to equity movements outside of a crash scenario.  Now that the Fed has effectively backstopped LQD it seems like significant near term price declines are unlikely, thus probably rendering puts on LQD as ineffective.  Not sure about HYG as real distress has yet to work its way through the system, and the Fed is also soft backstopping that market as well (writing puts seem reasonably interesting tho...)

 

So that does leave VIX as another candidate - will be looking into calls on the VIX, as well as ETN/ETPs on vol. 

[scorpioncapital]

If somewhat runaway inflation is the next outlier scenario , tail hedging will not be the same. Tail hedging works for out of the blue cataclysms. Even if the stock market drops say 50% but in a slow drip drip fashion then 2 month rolling deep out of the money puts are all gonna pack a much smaller bunch. You might not make any money. I am not sure how an inflationary environment works exactly. Maybe some from the early 80s now but unless it's a HUGE readjustment in TTT, or HYG, or the SP500 these puts won't activate a huge tail hedge. That's why I actually think tail hedges only protect sudden collapse in equities or bonds. Not slow movements.

[Kaegi2011]

If somewhat runaway inflation is the next outlier scenario , tail hedging will not be the same. Tail hedging works for out of the blue cataclysms. Even if the stock market drops say 50% but in a slow drip drip fashion then 2 month rolling deep out of the money puts are all gonna pack a much smaller bunch. You might not make any money. I am not sure how an inflationary environment works exactly. Maybe some from the early 80s now but unless it's a HUGE readjustment in TTT, or HYG, or the SP500 these puts won't activate a huge tail hedge. That's why I actually think tail hedges only protect sudden collapse in equities or bonds. Not slow movements.

 

Agreed.  If it's a slow drip without vol going up it's not going to hedge much of anything.  I think this works b/c 1) due to the infrequency of events the market underprices the risk, and 2) the explosion of vol assumptions in the underlying instruments - both of which contribute to the convexity of the payoffs.

[scorpioncapital]

Don't know if it's Markowitz who studied this but I notice we have had a cataclysm every decade since maybe 1980. It is very interesting to think about. Also seems each disaster is bigger than the next one. Whether man made or natural, I think big sudden disasters are more common then slow moving flat or declining periods.

[Kaegi2011]

Don't know if it's Markowitz who studied this but I notice we have had a cataclysm every decade since maybe 1980. It is very interesting to think about. Also seems each disaster is bigger than the next one. Whether man made or natural, I think big sudden disasters are more common then slow moving flat or declining periods.

 

One very high level way to rationalize it (not sure if it's the correct way...) is to think about the leverage in the system.  If the economy is more levered than before, than smaller % nominal changes can lead to same if not higher equity changes.  If one were to argue for this strategy, I think that would be a rather intuitive and compelling argument (for me at least).