Tags: Spitznagel | Universa | Market | Unnatural

Spitznagel of Hedger Universa: Market 'Unnatural, Distorted'

By    |   Sunday, 26 May 2013 10:28 AM

Growing use of hedging indicates that a growing number of investors may fear a stock market crash.

Inflows to Universa Investments, which specializes in hedging against huge stock drops, shows that more investors think this year's stock market rally has lasted too long.

"People are starting to recognize that these market moves are unnatural and distorted," Universa president and chief investment officer Mark Spitznagel told CNNMoney.

Video: Economist Predicts 'Unthinkable' for 2013 

Universa buys options that garner large returns when the stock market drops more than 20 percent. And Spitznagel believes that will likely happen within six months, and definitely within a year.

The sharp drop on Japan's stock market Thursday foreshadows things to come in the U.S. market, he told CNNMoney. "I think there will be a lot of false starts before it does, and this may be one of them."

The investment management firm focuses on tail-risk hedging or protecting investors against "black swan" hedging, a term coined by Universa's adviser, economist and former derivatives trader Nassim Taleb.

Black swan events are unforeseen and disastrous occurrences, like the 2008 financial crisis. When the S&P 500 fell 40 percent, Universa obtained gains of over 115 percent, CNNMoney reported.

Banks and pension funds use it as an insurance policy against stock market crashes.

Claude Bovet of Lionscrest Capital told CNNMoney that he has invested substantially more with Universa the last few months. "It allows me to be bullish. You can participate in all the upside of the stock market but without being complacent."

Few predict a market crash of huge proportions, but that makes buying options cheap for Universa.

Many observers believe rising stock markets are due to the loose monetary polices and large bond purchases of central banks.

"Central banks may well be inflating the biggest financial bubble the world has ever seen, the popping of which would trigger a second global slump, but they are convinced they know what they are doing," writes Larry Elliott, economics editor at the Guardian, echoing a view held by many.

Japan's Nikkei may have dropped 7 percent in a single day simple because it had risen quickly and was due for a correction, he says. The real question is if this is a pause or the beginning of a crash. Central banks would rather have stocks go through the roof than deal with deflation, and they think the extra liquidity will create of sustainable recovery, he notes.

"If they are wrong and the bubble bursts before the recovery arrives, it will be the mother of all credit busts."

Video: Economist Predicts 'Unthinkable' for 2013

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Inflows to Universa Investments, which specializes in hedging against huge stock drops, show that more investors think this year's stock market rally has gone too far.
Sunday, 26 May 2013 10:28 AM
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