The Paradox of Higher Returns With Lower Risk

In this video, Universa Investments’ Founder and CIO Mark Spitznagel simplifies their rapidly growing concept of tail-hedged equities, specifically how incorporating asymmetry into portfolio construction and asset allocation can significantly improve risk-adjusted returns. In particular, Mr. Spitznagel echoes the sentiments of many investors, who have found the recent monetary policy environment for traditional asset allocation strategies extremely challenging.

Mr. Spitznagel shows at a very high level how using something that loses a small fixed amount when markets rally but can make many multiples of that in a sell-off, like tail insurance, in conjunction with a higher stock/bond mix, can achieve this profile that has potentially higher returns with much lower risk. Tail-hedged equities have been an increasingly valuable tool for many investors akin to the creation of risk parity, although with more transparency in the risk management process.

Universa, a decade old hedge fund that originated the concept of tail hedging and gained fame in 2008, recently announced a sizeable partnership with the large consultant Willis Towers Watson for hedging equity positions as a part of long term portfolio construction for their endowment, foundation, and pension clients.

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