Mark Spitznagel

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 CA, Northport Point MI
Occupation	Hedge Fund Manager

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

Spitznagel is known for a hugely profitable billion dollar derivatives bet on the stock market crash of 2008,^[1][4][5] for allegedly crashing the market again in May 2010,^[6] as well as for his highly unconventional investment style which targets infrequent enormous profits and frequent small losses.^[1][4]

Spitznagel is the owner, founder, and Chief Investment Officer of the Santa Monica, California-based hedge fund management company Universa Investments, L.P., which he founded in 2007.^{[1][4][7][5][8][9][10][11]} Universa specializes in hedging tail risks^[5][10] and has approximately $6 billion under management.^{[1][2][4][5][9][11][12]} In 2009, Spitznagel closed his funds to new investors.^[1][11] Universa reportedly has large Chinese and Middle Eastern sovereign wealth funds among its investors.^[2]

Spitznagel has been an independent pit-trader at the Chicago Board of Trade,^{[1][2][4][5][8][10]} the head of equity options in a secretive proprietary trading group at Morgan Stanley in New York^[4][10] (until they requested that he sign a stringent “noncompete” agreement^[1]), and a partner at hedge fund Empirica Capital in Greenwich and New York.^[10][13][14] 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][10]

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][4][5][9][11][12][15][16]} 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][4] Despite this superior aggregate performance, Spitznagel comments that it was “done in a very lumpy way, for the most part, it's not very compelling.”^[4]

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^[6] (and for which Spitznagel was subpoenaed by the U.S. Securities and Exchange Commission^[4]). Spitznagel responded that “Universa alone couldn't have caused the meltdown. We had reached a critical point in the market, and it was poised to collapse.^[6] Universa is not in the business of causing crashes but is rather in the business of protecting its clients from them.”^[17]

In defense of his actions (or, as some have suggested, in deflecting attention from them^[4]), Spitznagel wrote a Wall Street Journal op-ed criticizing the current Federal Reserve expansionary monetary policy as the ultimate cause of the stock market swoon, comparing the aligned risky positions of traders induced by low interest rates to a fragile network of earthquake faults that rupture together.^[18]

Investor

Spitznagel has been vague when discussing his investing (preferring instead to discuss the writings of Ludwig von Mises or Laozi^[1][3][19]), though he is clearly an adherent of the value investing philosophy. Spitznagel hailed Benjamin Graham and the “margin of safety” in a Wall Street Journal op-ed,^[20] and has even likened the esoteric derivatives trading that he does in his hedge funds to value investing due to his emphasis on long-term expected intrinsic value over short-term market swings.^[4] (In the same op-ed, Spitznagel cautioned that the US stock market was as overvalued “relative to net asset replacement cost”—the Q ratio—as at any time since 1900 save the late 1990s, implying eventually “much lower stock market prices.”^[20])

In June 2011, CNBC reported on a research piece by Spitznagel (The Dao of Corporate Finance^[21]) which predicted a 40% correction in the S&P 500 stock index, based on “stock valuations, put in the context of 110 years of stock-market history.”^[22]

Spitznagel has become notorious for very concentrated bearish bets in his tail-hedging funds,^{[1][4][5][9][11][12][15][16][6]} through what he calls his “bizarre, positively-skewed approach” to investing.^[3] This is presumed to mean long convexity-type positions, as in out-of-the-money puts on overvalued equities^[1][2][5] (such as Lehman Brothers,^[23] about which he has responded “It's a regrettable aspect of our trade that we tend to do very well on others' misfortune”^[24]).

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.”^[4] In fact, according to Spitznagel, Wall Street and hedge funds tend to do the opposite of him, “manufacturing returns that look steady, but in reality, all they are doing is creating a very negatively skewed distribution. They make small amounts of money very often and sometimes lose a lot. It is just a big game.”^[15]

In regard to the patience and persistence required of his method, Spitznagel has said “It's like you're playing the piano for ten years and you still can't play chopsticks, and the only thing you have to keep you going is the belief that one day you'll wake up and play like Rachmaninoff.”^[13][14]

Forbes has described Spitznagel's investment strategy as “bets on the fat tails…delivering a string of mediocre results interrupted occasionally by spectacular years.”^[25]

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.^[4] There, as the youngest trader in the bond pit,^[10] 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][26][27]} 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.^[27] 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.”^[4]

Black Swan Theory

Universa's tail-hedging strategy (named the “Black Swan Protection Protocol”)^[4][5] 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 (who is an advisor to Spitznagel’s Universa funds^{[4][5][9][10][11]}). Spitznagel and Taleb are long-time collaborators,^[11] going back to Spitznagel's graduate study at the New York University Courant Institute of Mathematical Sciences where Taleb was a professor.^{[4][10][13][14]} While Spitznagel has tried to remain anonymous,^[4] Taleb, who is very vocal in the media, has become more the face of Universa (despite Taleb calling himself “in general a risk adviser to Universa, I don't know their positions, I'm not involved in trading.”^[28]).

Austrian School

Spitznagel has been an ardent proponent of Austrian economist Ludwig von Mises and critic of Federal Reserve monetary policy and Keynesianism. In a series of Wall Street Journal op-eds, Spitznagel extolled the views of 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.”)^[19] and criticized the interventionism of Federal Reserve chairman Ben Bernanke (“easily the most significant market manipulator in history”).^[20]

Inflation bet

In July 2009, Spitznagel opened a fund betting on hyperinflation.^[1][2][11]

In a July 13, 2009 Financial Times column, Spitznagel and Taleb warned against excessive leverage and debt and the risks of hyperinflation from Federal Reserve debt monetization.^[29]

Personal

Spitznagel keeps homes in the East Gate Bel Air section of Los Angeles (in an estate which he bought in 2009 from Jennifer Lopez and Marc Anthony) and in Northport Point, Michigan.^[30] He also owns a cherry and goat farm in Michigan.^[2]

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” (presumably because Spitznagel is an instrument-rated pilot and skier).^[13][14]

Forbes described the “unruffled”, loafered Spitznagel as looking “better prepared for a yacht race than for doomsday.”^[31]

Publications

• Spitznagel, M. (2011) All About the Benjamins, The Wall Street Journal, March 30, 2011
• Spitznagel, M. (2010) The Fed and the May 6 'Flash Crash', The Wall Street Journal, May 28, 2010
• Spitznagel, M. (2009) The Man Who Predicted the Depression, The Wall Street Journal, November 7, 2009
• Taleb, N.N., Golstein, D.G., and Spitznagel, M. (2009) The Six Mistakes Executives Make in Risk Management, Harvard Business Review, October, 2009
• Taleb, N.N., Spitznagel, M. (2009) Time to tackle the real evil: too much debt, Financial Times, July 13, 2009

References

1. ^ ^{a b c d e f g h i j k l m n o} Black Swan Trader 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} The Secret to Mark Spitznagel's Success? Not Following the Crowd, CIMS Newsletter, Fall/Winter, 2009
4. ^ ^{a b c d e f g h i j k l m n o p q r s t} Profiting from Disaster, Risk magazine, January, 2011
5. ^ ^{a b c d e f g h i j} October Pain Was ‘Black Swan’ Gain, The Wall Street Journal, November 4, 2008
6. ^ ^{a b c d} Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?, The Wall Street Journal, May 11, 2010
7. ^ Mr. Volatility and the Swan, The Wall Street Journal, July 13, 2007
8. ^ ^{a b} Flight of the Black Swan, Bloomberg Markets, May, 2008
9. ^ ^{a b c d e} Taleb's `Black Swan' Investors Post Gains as Markets Take Dive, Bloomberg, October 14, 2008
10. ^ ^{a b c d e f g h i} Universa Investments L.P., firm website
11. ^ ^{a b c d e f g h} Black Swan Fund Makes a Big Bet on Inflation, The Wall Street Journal, June 1, 2009
12. ^ ^{a b c} Preparing for the Next 'Black Swan', The Wall Street Journal, August 21, 2010
13. ^ ^{a b c d} Malcolm Gladwell, Blowing Up, The New Yorker, April 29, 2002
14. ^ ^{a b c d} Malcolm Gladwell, What the Dog Saw: And Other Adventures. Little, Brown and Company. 2009
15. ^ ^{a b c} Black Swan Bets, Forbes, January 15, 2009
16. ^ ^{a b} The Stars of The Recession, Newsweek, January 19, 2009
17. ^ Chicago fires back over stocks sell-off blame, Reuters, May 11, 2010
18. ^ Spitznagel, The Fed and the May 6 'Flash Crash', The Wall Street Journal, May 28, 2010
19. ^ ^{a b} Spitznagel, The Man Who Predicted the Depression, The Wall Street Journal, November 7, 2009
20. ^ ^{a b c} Spitznagel, All About the Benjamins, The Wall Street Journal, March 30, 2011
21. ^ Special Research from Universa Investments L.P., research section on firm website
22. ^ Black Swan: A 40 Percent Correction?, CNBC.com, June 16, 2011
23. ^ DealBook, The New York Times, January 29, 2009
24. ^ Overheard, The Wall Street Journal, February 14, 2009
25. ^ The Oracle of Doom, Forbes, February 2, 2009
26. ^ Everett Klipp: 'Babe Ruth of the CBOT', Futures Magazine, May 1, 1999
27. ^ ^{a b} Veteran Trader of the Chicago Board of Trade, Chicago Tribune, January 31, 2011
28. ^ 'Black Swan' Author Denies Role in Market Meltdown, CNBC.com, May 12, 2010
29. ^ Taleb and Spitznagel, Time to tackle the real evil: too much debt, Financial Times, July 13, 2009
30. ^ J-Lo and Marc Anthony Sell In Los Angeles to Financier, The Wall Street Journal, January 8, 2010
31. ^ Protect Your Tail, Forbes, June 27, 2011

Persondata
Name	Spitznagel, Mark
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Date of birth	March 5, 1971
Place of birth	Michigan
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